In: Accounting
1. When identifying the NCI share of equity explain how intragroup transactions can influence the calculation.
2. Why are intragroup transactions adjusted for on the consolidation worksheet?
250 each
SOLUTION
1.
The NCI does not affect the adjustment itself, as the full effects of the intragroup transaction are adjusted for on consolidation. However, where the subsidiary records profit which is unrealised to the group, this affects the calculation of the NCI. The NCI is entitled only to a share of consolidated equity rather than subsidiary equity. Hence, where the subsidiary has recorded unrealised profit, the NCI share of the recorded profit of the group must be adjusted for any of that profit which is unrealised. In the Step 2 & Step 3 calculations of the NCI share of equity, this is a share of recorded equity. As adjustments are made for intragroup transactions, where these transactions reflect adjustments for unrealised subsidiary profit, an adjustment is also made to the NCI share of profit. The net result is then that the NCI gets a share of realised subsidiary equity.
2.
The consolidated financial statements are the statements of the
group, i.e. an economic entity consisting of a parent and its
subsidiaries. These consolidated financial statements then can only
contain revenues, expenses, profits, assets and liabilities that
relate to parties external to the group.
Adjustments must be made for intragroup transactions as these are
internal to the economic entity, and do not reflect the effects of
transactions with external parties. This is consistent with the
entity concept of consolidation, which defines the group as the net
assets of the parent, together with the net assets of the
subsidiaries. Transactions between these parties internal to the
group must be adjusted in full.