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Financial Reporting · Module 5: Business combinations and group accounting

The $7,500 Comes Back

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Chapters

  1. 0:00Case
  2. 0:27Release
  3. 1:18Direction
  4. 1:56Recap

In short

In the year after an intragroup inventory sale, the prior adjustment is rebuilt through opening retained earnings and the profit is released through cost of sales once the stock is sold outside the group. Direction matters only with a non-controlling interest: in an upstream sale the NCI shares the after-tax adjustment.

  • Debit opening retained earnings (after tax) and income tax expense; credit cost of sales.
  • Downstream sales (parent to subsidiary) do not affect NCI.
  • Upstream sales (subsidiary to parent) share the adjustment with NCI.

Transcript

0:00Case

Last time, $7,500 of profit was stuck on Wombat's shelves. This year, Wombat sells that stock to outside customers. So the profit is finally real, and the group gets to recognize it. But consolidation starts again from each company's own books every year.

0:27Release

Last year's entry is gone. So first, we rebuild it. After tax, last year's adjustment took $5,250 off group profit. That now sits in opening retained earnings: debit $5,250. This year, Wombat's cost of sales carries the stock at $30,000. The group's cost was only $22,500. Credit cost of sales, $7,500. The deferred tax asset reverses. Debit income tax expense, $2,250. Debits $7,500, credits $7,500. It balances.

1:18Direction

Pause. If Wombat had other owners, would the direction of the sale matter? Yes. Suppose Platypus owns only 80% of Wombat. Parent sells to subsidiary, downstream: the profit sits in the parent. The non-controlling interest isn't affected. Subsidiary sells to parent, upstream: the profit sits in Wombat. So NCI carries its share: 20% of $5,250, or $1,050.

1:56Recap

Rebuild last year, release this year, and watch the direction. Next time: deferred tax, in four boxes. Subscribe so you catch it.

Sources

  • AASB 10 Consolidated Financial Statements, para B86(c)
  • AASB 112 Income Taxes
  • CPA question bank: cpa-fr-0202, 0999

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