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In: Accounting

Discuss how intercompany transfers should be treated for consolidation purposes. NB: make reference to the related...

Discuss how intercompany transfers should be treated for consolidation purposes. NB: make reference to the related IFRS’s an IAS’s in your discussion.

Solutions

Expert Solution

Intercompany transactions are transactions that happen between two entities of the same company. Not adjusting intercompany transactions results in consolidated financial statements that do not offer a true and fair view of the group’s financial situation.

Intercompany eliminations (ICE) are made to remove the profit/loss arising from intercompany transactions. No intercompany receivables, payables, investments, capital, revenue, cost of sales, or profits and losses are recognised in consolidated financial statements until they are realised through a transaction with an unrelated party.

  • In consolidated income statements, eliminate intercompany revenue and cost of sales arising from the transaction.
  • In the consolidated balance sheet, eliminate intercompany payable and receivable, purchase, cost of sales, and profit/loss arising from transaction.

IAS 27 Separate Financial Statements (2011) and IFRS 10 Consolidated Financial Statements

Intragroup balances, transactions, income, and expenses should be eliminated in full. Intragroup losses may indicate that an impairment loss on the related asset should be recognised. [IAS 27.24-25]

The financial statements of the parent and its subsidiaries used in preparing the consolidated financial statements should all be prepared as of the same reporting date, unless it is impracticable to do so. [IAS 27.26] If it is impracticable a particular subsidiary to prepare its financial statements as of the same date as its parent, adjustments must be made for the effects of significant transactions or events that occur between the dates of the subsidiary's and the parent's financial statements. And in no case may the difference be more than three months. [IAS 27.27]

Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances. [IAS 27.28]


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