ACCT20054

Q28.1 What is an intragroup transaction and why do we need to know about them?
Intragroup transaction is a transaction performed between the separate companies within an
economic entity.
In preparing consolidated financial statements, there is a requirement that the effects of all
intragroup transactions must be eliminated in full even where the parent entity does not 100 per
cent own the subsidiary. As paragraph B86(c) of AASB 10 states:
Consolidated financial statements eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to transactions between entities of the group
(profits or losses resulting from intragroup transactions that are recognised in assets, such as
inventory and fixed assets, are eliminated in full).

Q28.2 When does an intragroup inventory transaction require us to perform a

consolidation adjustment to tax expense?
The economic entity will treat the related profits as unrealised when doing the consolidation
adjustment to tax expense while performing intragroup inventory transaction.

From the perspective of the separate legal entity, unrealised profits are eliminated from
the consolidated financial statement which in turn leads to a liability for taxation. The
individual legal entities will pay tax on their own account if they have not notified the tax
office that they want to be treated as a tax consolidated entity for tax purposes.

From the groups perspective, an amount of profit related to the sale has not been realised
and should not be included in the economic entitys profits until sale has been made to an
entity that is not part of the group. Thus, if tax has been paid by one of the separate legal
entities, this will represent a prepayment of tax (a deferred tax asset), as this income will
not be earned by the economic entity until the inventory is sold outside the group.

Q28.6 If one entity sells inventory to another entity, which is 80% owned, what percentage
of the sales revenue needs to be eliminated in the consolidation process?
When consolidated financial statements are prepared, the effects of all transactions between
entities within the economic entity must be eliminated in full regardless how much the parent
entity owns the subsidiary. For example, whether the parent entity owns 100 per cent or 80 per
cent of the subsidiary, all transactions between entities within the economic entity should be
eliminated in full. This is consistent with paragraph B86(c) of AASB 10 which states:
Consolidated financial statements eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to transactions between entities of the group
(profits or losses resulting from intragroup transactions that are recognised in assets, such as
inventory and fixed assets, are eliminated in full).
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ACCT20054

Q28.7 A Ltd owns 100% of B Ltd, which in turn owns 100% of C Ltd. During the financial
year, A Ltd sells inventory to B Ltd at a sale price of $150,000. The inventory cost A Ltd
$100,000 to produce.
Within the same financial year, B Ltd subsequently sells the same inventory to C Ltd for
$200,000 without incurring any additional costs. At the end of the financial year, C Ltd has
sold half of this inventory to companies outside the group for a sale price of $180,000. At
year end C Ltd still has the half of the stock on hand.
Required: from the economic entitys perspective, determine:
a) The sales revenue for the financial year
Revenues should not be recognised until an external sale of inventory has taken place. Since
there are half of the stocks in C Ltd, the sales revenue would be $180,000 which is the actual
sales to the external entity as illustrated in the diagram below:

b) The value of closing inventory.

The entity is to record inventory at the lower of cost and net realisable value. The cost of the
inventory in this entity is $100,000. At the end of the financial year, there are half of the stock
left in C Ltd, hence, the cost of inventory as at end of the financial year is $50,000.
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