Question

Cancelling Intragroup loans during consolidation

Hi All,

I would like to know if intra group adjustments are made for loans in the work of consolidated retained earnings of the group.

If so can somebody please elaborate.

Answer 1

Loans from parent to subsidiary or from subsidiary to parent are normally offset. This because in the accounts of the loaner, it will be recorded as an investment and in that of the loanee, as a non current liability. In the accounts of the group as a whole, they serve no purpose as it is as if the group has loaned to itself and will only inflate the Non Current Assets and Non Current Liabilities figures.

Similarly, Interest on the loan is also written off. This is because, in the SOPL of the loaner, interest will appear as finance income but also as finance costs in the SOPL of the loanee.

Thus, to answer your question, there is usually no adjustment to be made to Consolidated Retained Earnings as Finance Income(loan interest) is already included in loaner's Retained Earnings and Finance Costs has already been deducted from loanee's Retained Earnings. Thus, they will naturally be nullified.

Comments

Hi Yajnesh, this was an amazing explanation.
Would it be possible for you to explain unrealised profits in associates?

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Hi, Rida

For your question regarding unrealised profit in associates,

Unrealised profits are eliminated to the extent of the investor's interest in the associate. For example, if a parent company P sells good to Associate A in which P owns 30% and the unrealised profit on this transaction is $10000, the resulting adjustments will be:

Dr Cost of Sales $3000 (30% x 10000)

Cr Investment in associate $3000

This elimination is necessary to avoid “double counting” the profit that is already included in the investor’s share of the associate’s profit for the year.

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Hi Yajnesh,
For the same questions as Rida.
My understanding is as follows.
As for the URP, the 'revenue account' and 'cost of sale account' of seller are not equal, giving rise to the non-existing profit. To eliminate the profit, we should cancel the both accounts ,as well as the URP that affects the group retained earning.
However, when it comes to the loan note, the finance income equals to the cost, so they have no influence on group retained earning.

To summarise, only when the intra-group transaction giving rise to 2 unequal accounts that cannot be naturally nullified( eg. a non-existing profit resulted from a greater revenue than cost to the seller), there will be an influence on group retained earning. Thus adjustment is needed in the working of group retain earning.
Is that right?