Question

How should a company treat intercompany sales of assets in the consolidated financial statements?

Answer 1

In order to present Financial Statements for the group in a consolidated format, the effect of transactions between group entities should be eliminated. As per IFRS 10, the Inter group balance and intra group transactions and resulting unrealised profits should be eliminated in full. Unrealised losses resulting from Intragroup transaction should also be eliminated unless cost cannot be recover.

Liabilities due to one group entities by another will be set off against the corresponding asset in the other group entity's financial statements, sales made by one group entity to another should be excluded from turnover and from purchase (or related heads) or the appropriate expense heading in the consolifdated statement of profit & Loss.

The unrealised intra company profit arising from intra group transfer of Property, plant & equipment as defined in IAS 16, Intangible assets as defined in IAS 38 and Investment property as defined in IAS 40 are also eliminated from the consolidated financial statement.

For Instance:

Illustration: Parent owns 60% of a subsidiary. The subsidiary sells some asset to parent for $35,000 and makes a profit of $15,000 on the sale. The asset in the parent's balance sheet at the year end. Examine the Intra group transaction and pass the necessary journal entries?

Solution: The parent must eliminates 100% of the unrealised profit on consolidation. The asset will therefore, be carried in the group's balance sheet at $20,000 ($35,000-$15,000). The consolidated income statement will show a corresponding reduction in profit of $15,000.

The double entry on consolidation is as follows:

Profit on sale of asset Dr $15,000

To Asset $15,000

The reduction of gross profit of $15,000 is allocated between the parent company and non controlling interest in the ratio of their interests - 60% and 40%