Elimination Of Intra-group Transactions – FAQ | IFRS

Elimination of intra-group transactions

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Elimination of intra-group transactions – Intra-group transactions are transactions between entities within a group of entities and that group is consolidated into one set of Consolidated Financial Statements. Intra-group transactions are not with third parties outside the scope of consolidation (this means the group of companies consolidated to one unit). In the Consolidated Financial Statements only balances and transactions remain with third parties outside the scope of consolidation.

In the consolidation process all company financial statements of each reporting entity in the scope of consolidation are first combined into a sub-consolidation, then all intra-group transactions are eliminated, sometimes leaving a small (not material) mismatch. Material mismatches have to be investigated and corrected in close collaboration with the two entities involved. Also Intra-company transactions (transactions with related companies outside the scope of consolidation) may be netted, showing only the remaining receivable or payable with that related company.

Intra-group profits Elimination of intra-group transactions

Any profits resulting from intra group transactions are eliminated from the consolidated accounts. (For example this would include fixed assets, stocks, investments etc. transferred within the group). Any profits resulting from intra group transactions are eliminated from the consolidated accounts. (For example this would include fixed assets, stocks, investments etc. transferred within the group). Elimination of intra-group transactions

These profits are from, for example, the sale of a finished product made in the consolidated manufacturing subsidiary A in country Z to importing subsidiary B in country X. Subsidiary A records it’s normal trading profit on such a sale. However, subsidiary B has not completed the sale to the third party/customer and has recorded the sale in its inventory against costs at the reporting date. Upon consolidation (presenting the financial statements of the parent entity and its subsidiary entities as a single economic entity in the consolidated financial statements of the parent entity) the profit recorded by subsidiary A has to be eliminated, at the consolidated level these items are still in inventory at subsidiary B.

Example eliminating Intra-group transactions Elimination of intra-group transactions

An live example of eliminating intra-group receivables and intra-group payables is shown below. The consolidation represents a Dutch holding company preparing consolidated financial statements for this holding company (the parent) and its subsidiaries (a sub-consolidation). The holding company and its subsidiaries are part of an USA listed multinational that also prepares consolidated financial statements of the worldwide group.

Elimination of intra-group transactions

Why is it necessary to make adjustments for intragroup transactions?

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. Elimination of intra-group transactions

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. Elimination of intra-group transactions

What are the key questions to consider when preparing consolidation worksheet adjustments for intragroup transactions?

The five key questions to consider when preparing consolidation worksheet adjustments for intragroup transactions are as follows.

1. Is this a prior period or a current period transaction?
2. What has been recorded by the legal entities?
3. What should be reported by the group?
4. What adjustments are necessary to get from the legal entities’ amounts to the group amounts?
5. What is the tax effect of the adjustments made?

1. Is this a prior period or a current period transaction?
If it is a current period transaction, its effects will be eliminated against the respective accounts. If it is a prior period transaction, the effects on prior period income and expenses accounts will be eliminated against the retained earnings account (opening balance), while its effects on current period accounts will be eliminated against the respective accounts.

2. What has been recorded by the legal entities? Elimination of intra-group transactions
That is, what accounts on the left-hand side of the worksheet contain amounts arising from, or affected by, the intragroup transaction and what are the amounts recorded in those accounts?

3. What should be reported by the group?
That is, what amounts should the group report on the right-hand side of the worksheet for the individual accounts affected by the intragroup transaction?

4. What adjustments are necessary to get from the legal entities’ amounts to the group amounts?
That is, the adjustments are determined by comparing what has been recorded by the legal entities to what the group needs to report.

5. What is the tax effect of the adjustments made?
Having determined the consolidation adjustment for the intragroup transaction, the tax-effect consequences need to be considered. Obviously, not all adjustments have tax consequences. The only adjustment entries that have tax consequences are those where profits or losses are eliminated (current tax effect) and carrying amounts of assets or liabilities are adjusted (deferred tax effect).

What is meant by ‘realisation of intragroup profits or losses’?

Profits/losses are realised when an economic entity transacts with another external entity. For a group, this is consistent with the concept that the consolidated financial statements show only the results of transactions with external entities. The consolidated statement of profit or loss and other comprehensive income will thus show only realised profits and realised losses. Profits/losses recognised by group members on sale of assets within the group are unrealised profits/losses to the extent that the assets are still within the group. Realisation of profits/losses on intragroup transactions involving assets normally occurs when an external party gets involved.

With intragroup sales of inventories, involvement of an external party, or realisation, occurs when the inventories are on-sold to an external entity.

With intragroup sales of depreciable assets, realisation occurs as the asset is used up, as the benefits are received by the group as a result of use of the asset. The proportion of profits/losses realised in any one period is measured by reference to the depreciation charged on the transferred depreciable asset.

See also: The IFRS Foundation

Elimination of intra-group transactions

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