Consolidation of Intra-Group Transactions and Accounting of Foreign Subsidiaries

MASTER IN FINANCE
MASTERS IN FINANCE

MASTER IN FINANCE
Contents
BRIEF......................................................................................................................................................3
TECHNICAL ASPECTS OF CONSOLIDATION.............................................................................................3
PRESENTATION......................................................................................................................................5
CONCLUSION.........................................................................................................................................5

MASTER IN FINANCE
MEMORANDUM TO : Board of Directors
FROM : Team Assignment
SUBJECT : Consolidation of intra-group transactions and accounting of
foreign subsidiaries
BRIEF:
OZ Minerals is engaged in the business of mining. Its main focus is on extraction of Copper.
Apart from the copper it also operates the mining of gold and silver. This company is the
third largest company of Australia in copper production. The main goal of the company is to
create the values to its shareholders.
TECHNICAL ASPECTS OF CONSOLIDATION:
i) Intra-group Transactions and Balances: A group comprises the number of
companies. There may a case, where such companies under the group undertake
the transactions. Such types of transactions among such companies are called as
intra-group transactions. At the time of consolidation, financial statements of such
companies are put together and consolidated results are generated. But in this
process intra-group transaction plays a vital role as their accounting treatment
become critical. If transaction is general such as sale, purchase etc. then there will
be no such difficulty in the consolidation (Velocity, 2012). In general, these
transactions do not affect the consolidated financial statement as these have no
any existence.
For Example: A company purchases the material from the other company. The
purchasing company will book the purchase in the income and expense statement
and payable in balance sheet. On the other side, selling company will book the
sales in income statement and receivables in the balance sheet. This transaction
has its separate identity for each company. But for the purpose of consolidation it
has lose its identity as transaction between the companies become reciprocal to
each other and intra-group balance will be null.
But, we always cannot say that balance of intra-group transaction will be null.
There may be some factors that may cause such reasons, some of which are as
under:
a) Reporting dates are differs
b) Sales is booked as fixed assets by the other company
c) Profit margin on sales
During the consolidation, we should be aware of these types of factors, avoidance
of which cause the overstatement or understatement of the financial reports. So, it
should be taken care of.