Adnanced financial accounting

An IAS and IFRS Approach

General step
1. Elimination of investment, share capital and pre-acquisition retained earnings
and recognition of excess, deferred tax liability asset and non-controlling
interest as at date of acquisition.
Share capital (subsidiary) (Db)
Retained earnings (subsidiary at acquisition on date) (Db)
Goodwill (Db)
Adentifiable assets (excess allocation) (Db)
Adentifiable assets (excess allocation) (Cr)
Deferred tax liability (Cr)
Investment in subsudiary (Cr)
Non-controlling interest (NCI) (Cr)
2. Recognition of excess amortization
Past amortization
Retained earnings (subsidiary) (Db)
NCI (Db)
Identifiable asset (Cr)

Current amortization
Identifiable expense (Db)
Tax expense (Cr)

3. Recognition of tax effect from amortization

Past amortization
Current amortization
Deferred tax liability (Db)
Deferred tax liability (Db)
Retained earnings (Cr)
Tax expense (Cr)
NCI (Cr)
4. Allocation of share of change in retained earnings of subsidiary to NCI from the
date of acquisition to beginning of current period.
Retained earnings (subsidiary) (Db)
NCI (Cr)
5. Allocation of share of current profit after tax of subsidiary to NCI.
Income to NCI (Db)
NCI (Cr)
6. Elimination of dividends declared by subsidiary.
Dividend income (parent) (Db)
NCI (Db)
Dividends declared by subsidiary (Cr)
7. Elimination of other resiprocal balances (intercompany receivable and
payable, revenues and expense, etc.)
Adjustment to eliminate intercompany transaction
Intercompany transaction-inventories
1. Elimination of intercompany purchases and sales unrealized profit.
Sales (Db)
Cost of good sold (cogs) (Cr)
Inventory (Cr)
2. Adjustment of tax on enrealized profit.
Deferred tax asset (Db)
Tax expense (Cr)
3. Recognition of realized profit in beginning inventory.
Opening retained earnings (Db)
NCI (Db)

COGS (Cr)
4. Adjustment of tax on realized profit in beginning inventory.
Tax expense
Opening retained earnings (Db)
NCI (Cr)
Intercompany transaction fixed assets
1. Elimination of intercompany purchases and
adjusting asset value to original cost
Current year
Gain on sale (Db)
Asset* (Db)
Accumulated depreciation (Cr)

2. Adjustment of tax on unrealized profit

Current year
Deferred tax asset (Db)
Tax expense (Cr)

sales and unrealized profit and

Next year
Opening retained earnings (Db)
NCI (Db)
Asset* (Db)
Accumulated depreciation (Cr)
*debit/credit depending on the
transaction
Next year
Deferred tax asset (Db)
Opening retained earnings (Cr)
NCI (Cr)

3. Adjustment of over depreciation from prior year

Accumulated depreciation (Db)
Opening retained earnings (Cr)
NCI (Cr)
4. Adjustment of tax from over depreciation from prior year
Tax expense (Db)
Opening retained earnings (Cr)
NCI (Cr)
5. Adjustment of current depreciation
Accumulated depreciation (Db)
Depreciation expense (Cr)
6. Adjustment of tax from current over depreciation
Tax expense (Db)
Deferred tax expense (Cr)
Problem 4.3
Consolidation journal 1 elimination of investment
Share capital 200.000
Retained earnings (acquisition date) 150.000
Buildings and equipment 31.250
Deferred tax liability 6.250
Investment in Sapphire (acquisition date) 300.000
NCI (acquisition date) 75.000
Consideration paid at acquisition date (80%) 300.000
Fair value of subsidiary (100%) 375.000
Fair value of NCI (20%) 75.000
Book value of Opal Ltd (retained earnings + share capital) 350.000
Excess fair value over book value (allocated to building & equipment) 25.000

Fair value adjustment (after tax) 25.000

Under valuation of buildings and equipment (before tax) 31,250
Tax on under valuation of buildings and equipment 6,250
Consolidation journal 2 past and current depreciation on undervalued buildings
Opening retained earnings (31.250/10*2*80%) 5.000
NCI (31.250/10*2*20%)
1.250
Depreciation expense (31.250/10)
3.125
Accumulated depreciation
9.375
Consolidation journal 3 tax effect of depreciation on undervalued buildings
Deferred tax liability
1.875
Opening retained earnings (6.250/10*2*80%)
1.000
NCI (6.250/10*2*20%)
250
Tax expense (6.250/10)
625
Consolidation journal 4 eliminate dividend income
Dividend income (80% parent share) 16.000
NCI (20% NCI share)
4.000
Dividend declared
20.000
Consolidation journal 5 NCI share of current income
Income to NCI
11.020
NCI
11.020
Profit before adjustment60.000
(+) prior years unrealized profit on inventory 5.000
(-) current years unrealized profit on inventory (40%*20.000)-8.000
(+)tax effects on realized profit on inventory (1.600-1.000) 600
(-)depreciation on undervalued building -3.125
(+) tax effect on depreciation on undervalued building 625
Adjusted profit 55.100
NCIs share 11.020
Consolidation journal 6 - NCI share of retained earnings difference
Opening retained earnings
30.000
NCI
30.000
*20%(300.000-150.000)

Consolidation journal 7 recognition of realized profit in beginning inventory

Opening retained earnings (80%parent share)
4.000
NCI (20% NCI share)
1.000
COGS
5.000