Accounting Consolidation Report: Intra-Group Transactions and NCI

This report provides a comprehensive overview of accounting consolidation, focusing on intra-group transactions and non-controlling interests (NCI). It begins by explaining the elimination of intra-group transactions as per accounting regulations, including debts, claims, incomes, and expenditures. The report then delves into the equity method of accounting, detailing its application when a company has significant influence over another, and illustrates the relevant journal entries. Furthermore, it addresses the calculation of goodwill in consolidation, the treatment of NCI, and the requirements of AASB 127 concerning the elimination of intra-group transactions. The report also highlights the importance of reconciliation in the consolidation process and explores the concept of NCI, explaining its representation in financial statements and its impact on the parent company's reporting. Finally, the report covers the required disclosures for non-controlling interests, including ownership percentages and the application of accounting standards such as IAS 8 and IFRS 10.

ACCOUNTING 1
ACCOUNTING

ACCOUNTING 2
Executive summary:
This report talks about the process of consolidation and the need and the rules that have been
laid down under the process of consolidation. The need and the logic behind eliminating all
of the intra group transactions has been discussed. Further, the meaning of the non-
controlling interest and the way the same is calculated and the same is reported is also
discussed in this report.
Contents
Introduction:...............................................................................................................................3
Part A:........................................................................................................................................4
Part B:.........................................................................................................................................5
Part C:.........................................................................................................................................6
Conclusion:................................................................................................................................8
References..................................................................................................................................9

ACCOUNTING 3
Introduction:
As per the rules that have been laid down under the schedule 6 of the Accounting
Regulations, there is a requirement of the elimination of all of the intra group transactions
when the group accounts of two or more companies are being prepared. There has to be an
elimination of all of the debts and the claims along with the incomes and the expenditures
which are connected with the transactions to the entities included in the process of
consolidation. Further, the profits and the losses on all of the transactions have to be
eliminated to the tune these are included in the book value of the assets. The elimination of
these entries are done in the proportion of the shares held by the investor company in the
investee company. The company (JKY Ltd) needs to follow the requirements of the AASB.

ACCOUNTING 4
Part A:
The following are the rules and the requirements as have been laid down under the AASB
framework which are applicable in the case of JKY Ltd:
The equity method of accounting is the method which is used for the investments when one
company has a significant influence or control over another company. But when we say
significant control, it doesn’t mean a full control. This is the case when there is an existence
of some relationship between the parent company and the subsidiary. This does not mean the
relationship between the two companies as in the consolidation of financial statements.
An investor would be considered to have a significant influence when there is a control over
the investor by the investor. An investor is considered to have some significant control over
the investor when the investor owns between 20 to 50% of the share capital of the investee. In
the case wherein an investor holds less than 20% of the share capital of the investee, then the
investor could still go on to use the equity method inspite of the cost method. In the equity
method, there is no consolidation or any process of elimination. Under this method, an
investor would report his proportionate share in the equity of the investee as an investment
and that too at cost. The amount of the investment would be increased by the share of the
profit and loss and this amount would be on proportion of the shares of the investor in the
investee. This is known as the equity pick up. The amount of the dividend which has been
paid by the investor would be subtracted from the investment amount of the investor (ACCA
global, 2019).
In order to illustrate, if A company purchases 30% shares of B company, and if the company
reports an income of $ 100,000 and also the dividend of $50,000, then the A company would
report investments under the head of “Investments in associates or affiliates".

ACCOUNTING 5
The following would be journal entries that would be recorded:
Dr. Investments in Associates
Cr. Cash
A company received the dividend of $15,000 which amounts to $50,000 and this amount of
the dividend received would be reduced from the amount of an investment. The sole reason
for the same is the fact that the same has been received from the invested.
The following would be its journal entry:
Dr. Cash
Cr. Investments in Associates
In the end, A company would record the following net income and this would increase the
investment amount:
Dr. Investments in Associates
Cr. Investment Revenue
(Corporate finance institute, 2019).

ACCOUNTING 6
In the consolidation method, the amount of the goodwill is calculated by subtracting the
amount of the net assets of the investee from the consideration of the investor. The incomes
and the expenses would accrue in the proportion if the share capital which has been held with
the minority interest or the non-controlling interest. All of the assets and the liabilities would
be reported in the books of the parent company which has sole major influence on the
operations of the investee (Small business chron, 2019).
Under the equity method, the company which is investing into the investee company would
combine its books to report its control over the investee to the extent of equity share capital,
reserves and the retained earnings. The apt method to be used would depend upon one
scenario to another. In case, the company has a major control over the subsidiary including
the voting rights and also has a major influence including the controlling of the voting rights,
then the board of directors would decide to consolidate its financial statements (PWC, 2019).
Part B:
As per the relevant requirements of the AASB 127 which relates with the Consolidated and
Separate Financial Statements, any sort of intra group transactions or any transaction with
regard to the incomes, expenses, and dividends have to be completely eliminated from the
financial statements of the companies. The profits and the losses which are the result of the
intra group transactions will have to be recognised as assets such as the inventory and the
fixed assets. Any amount of the losses which occur due to the losses due to the transactions
entered into between the two companies, which may be the result of an impairment on the
assets would require a recognition in the consolidated financial statements. The AASB 112
which deals with the Incomes Taxes applies to the differences that arise due to the
elimination of the profits and the losses that results from these intra group transactions
(AASB, 2019).

ACCOUNTING 7
These intra group transactions form the part of the process of consolidation since these entries
have to be completely eliminated at the time of the consolidation. This forms a core part of
the close of the financial statements. These transactions are effective cut off tracking and
require the differences which are the result of the disputes and the arbitration (IAS plus,
2019). The result of the process of reconciliation can work in many ways when it comes to
the process of closing and also improves the reliability of the financial statements. The term
optimisation refers to the sources of all of the potential differences that need to be identified.
There are many of the financial and the commercial transactions that include the two
companies from the same industry to work side by side. An example of this is the issuance of
the sales invoice when any product is sold or any service is rendered. The company that has
rendered the service or sold the product would report as a receivable and the company to
which that invoice has been issued would report it as a payable, but when the companies are
working side by side, it is not recommended that these companies report the same amount as
a receivables and as payable, since that would be illogical. So, when the process of
consolidation takes place for these companies, these entries are eliminated in full. As on the
closing date of the balance sheet, the consolidated balance sheet or the financial statements
would include the assets and the liabilities which is the result of the reciprocal transactions
that does not exist within the group. If these entries are not eliminated, then it would mean an
overstatement or the overvaluation of the income and the overestimation of the expenses.
The process of searching for these account balances are tough for the consolidation manager
(Signma consco, 2019).
The financial statements of the two companies are consolidated as if they were functioning as
a separate company or as a single company. The various effects of the transactions between
these entities would be eliminated in full. Also FRS 102 requires the elimination of these

ACCOUNTING 8
intra group transactions and any unrealised profit or the loss would be completely eliminated.
The liabilities of one group that it owes to the other group would be set off as against the
assets of the other group.
The following journal entries would take place:
Parent
Dr Intercompany expense
Cr Intercompany Payable
Dr Intercompany payable
Cr Cash
Subsidiary
Dr Intercompany Receivable
Cr Intercompany Revenue
Dr Cash
Cr Intercompany Receivable
Subsidiary makes payment for it's rent
Dr Expense
Cr Cash
elimination of payable and receivable
Dr Intercompany rev

ACCOUNTING 9
Cr Intercompany exp
elimination of the revenue and expenses
Part C:
A non-controlling interest is also known as the minority interest which is the position of
ownership wherein the shareholder of the company owns less than 50% of the shares of the
company and is able to influence the management instead of controlling them.
This is the amount of the share capital of the investee company which is owned by the
outsiders. This is apart from the parent company. This amount of the sum total of the share
capital, reserves, etc are not owned by the parent company. The investor company would
always report this amount in the financial statements of the investee company in the
consolidated balance sheet. This represents the claim on the assets by the minority
shareholders and also in the consolidated statement of income as being the % of the profits
which is with the minority shareholders. These minority shareholders have a lesser amount of
influence on the management and the policies of the company and also, they have a very
limited number of voting rights. But they offer some significant growth with their experience
and capital, hence they are considered to be important. These are reported in the balance
sheet separately in the “Liabilities” section of the financial statements of the companies (My
accounting course, 2019).
A consolidation of the financial statements is considered to be the set of combined accounting
record that puts together the financials of the two companies. These include the parent
company as being the majority owner, the subsidiary or the purchased firm and the non-
controlling interest company. These companies are assumed to be separate companies when
consolidation is not done (Corporate finance institute, 2019).

ACCOUNTING 10
As per the relevant requirements that have been laid down by the relevant accounting
standards, a parent would represent the non-controlling interests in the statement of
consolidation of the financial statements of the company within the equity. The % of income
which is allocated between the parent and the non-controlling interest would be determined
on the basis of the interest which represents the ownership of these companies.
There are as such no disclosure requirements under the IFRS 10 of the Accounting Standards.
Any retrospective application of the accounting standards would be done as per the IAS 8
which deals with the Accounting policies, changes in the estimates of accounting and errors.
But in case, an entity is required to make any sort of adjustments to the accounting when it
comes to the involvement of the companies, then the previously prepared consolidated
financial statements will have to be revised. The stated financial statements. But these
companies are not required to consolidate any financial statements that were unconsolidated
previously and the same would continue not to be consolidated as on the date of the
application of the IFRS.
As per the IFRS 10, the entity would still be consolidated as on the date of the consolidation,
the entity shall not be consolidated if it were not been consolidated before.
The IAS 28 deals with the Investments in the Associates and the Joint ventures (IAS plus,
2019).
The following are some of the other disclosures that are required for the non-controlling of
the minority interest:
 The interest of the ownership in the various subsidiaries that are held by the parties
other than the parent company will have to be clearly identified, labelled. These have
to be reported in the consolidated financial statements within the equity which is
separate from the equity of the parent company.

ACCOUNTING 11
 There must be a clear understanding of the amount of the net income which is
attributable to the parent and which needs some presentation in the financial
statements.
 Any amount of change in the non-controlling interest of the parent company will have
to be disclosed consolidated financial statements on some consistent basis. The
ownership interest in the subsidiary would go in for change in case, the parent goes in
for a purchase of some additional interest in the ownership of the subsidiary of the
company. Or, the necessary changes will have to be reported in case, the parent goes
on to sell some part of the ownership interest or goes in for issue of some additional
interest in the ownership. All of these transactions are somewhat same in nature and
the standard requires that these be accounted for some regular basis and also be
treated as the equity transactions.
 Whenever any subsidiary is deconsolidated, then the amount of the retained non-
controlling equity portion of the investment of the investee company would be valued
and reported at its fair value. Any amount of the gain or the loss which arises from the
deconsolidation of this investee company would be reported as the fair value of any
non-controlling equity investment instead of being reported at its carrying value.
 Any company will have to provide enough disclosures which would clearly show and
identify and separate out the interest of the parent company with that of the interests
of the owners of the non-controlling companies (FASB, 2019).
Conclusion:
In the nutshell, whenever any two companies come together in which one company takes
over the other, then it is necessary for them to show their financial statements as one and
report them as a single company. Any amount of transaction which takes place between them

ACCOUNTING 12
would have to be eliminated no matter what since the same has been laid down by the
relevant accounting standards.
The amount of the non-controlling interest is the amount which does not belong to the parent
company and this has to be reported under the head of “Equity” in the consolidated financial
statements (Croneri, 2019).
References
Aasb.gov.au. (2019). Consolidated and Separate Financial Statements. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB127_03-08_ERDRjun10_07-09.pdf
[Accessed 6 May 2019].
Corporate Finance Institute. (2019). Equity Method Accounting - Definition, Explanation,
Examples. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/equity-method/
[Accessed 6 May 2019].
Corporate Finance Institute. (2019). Equity Method Accounting - Definition, Explanation,
Examples. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/equity-method/
[Accessed 6 May 2019].
Corporate Finance Institute. (2019). Non Controlling Interest (NCI) / Minority Interest -
Examples, Guide. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/non-controlling-
interest/ [Accessed 6 May 2019].
Iasplus.com. (2019). IFRS 10 — Consolidated Financial Statements. [online] Available at:
https://www.iasplus.com/en/standards/ifrs/ifrs10 [Accessed 6 May 2019].

ACCOUNTING 13
Library.croneri.co.uk. (2019). 5.2 Intragroup balances and transactions | Croner-i Tax and
Accounting. [online] Available at: https://library.croneri.co.uk/cch_uk/dgaap/b9-5-2
[Accessed 6 May 2019].
https://www.accaglobal.com, A. (2019). Preparing simple consolidated financial statements |
F3 Financial Accounting | ACCA Qualification | Students | ACCA Global. [online]
Accaglobal.com. Available at: https://www.accaglobal.com/in/en/student/exam-support-
resources/fundamentals-exams-study-resources/f3/technical-articles/preparing-simple-
consolidated-financial-statements.html [Accessed 12 May 2019].
Iasplus.com. (2019). IFRS 10 — Consolidated Financial Statements. [online] Available at:
https://www.iasplus.com/en/standards/ifrs/ifrs10 [Accessed 12 May 2019].
My Accounting Course. (2019). What is Non-Controlling Interest? - Definition | Meaning |
Example. [online] Available at: https://www.myaccountingcourse.com/accounting-
dictionary/non-controlling-interest [Accessed 6 May 2019].
Sigma Conso. (2019). Intra-group transactions: identifying differences | Sigma Conso.
[online] Available at: https://www.sigmaconso.com/en/intra-group-transactions-identifying-
differences/ [Accessed 6 May 2019].
Smallbusiness.chron.com. (2019). Consolidation vs. Equity Method of Accounting. [online]
Available at: https://smallbusiness.chron.com/consolidation-vs-equity-method-accounting-
55300.html [Accessed 6 May 2019].
www.pwc.com. (2019). Consolidation and equity method. [online] Available at:
https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-consolidation-
equity-method-accounting-2015 [Accessed 6 May 2019].

ACCOUNTING 14