The document discusses accounting for intercompany profits on depreciable assets and intercompany bond holdings. When a depreciable asset is sold between group companies, any profit is unrealized until the asset is sold outside the group. For consolidated financial statements, intercompany profits are eliminated, related income taxes are deferred, and the asset value and depreciation are adjusted based on the original purchase price. For bonds between group companies, gains or losses on purchase are realized for consolidated statements but eliminated from individual company statements along with interest income and expense.
The document discusses accounting for intercompany profits on depreciable assets and intercompany bond holdings. When a depreciable asset is sold between group companies, any profit is unrealized until the asset is sold outside the group. For consolidated financial statements, intercompany profits are eliminated, related income taxes are deferred, and the asset value and depreciation are adjusted based on the original purchase price. For bonds between group companies, gains or losses on purchase are realized for consolidated statements but eliminated from individual company statements along with interest income and expense.
The document discusses accounting for intercompany profits on depreciable assets and intercompany bond holdings. When a depreciable asset is sold between group companies, any profit is unrealized until the asset is sold outside the group. For consolidated financial statements, intercompany profits are eliminated, related income taxes are deferred, and the asset value and depreciation are adjusted based on the original purchase price. For bonds between group companies, gains or losses on purchase are realized for consolidated statements but eliminated from individual company statements along with interest income and expense.
The document discusses accounting for intercompany profits on depreciable assets and intercompany bond holdings. When a depreciable asset is sold between group companies, any profit is unrealized until the asset is sold outside the group. For consolidated financial statements, intercompany profits are eliminated, related income taxes are deferred, and the asset value and depreciation are adjusted based on the original purchase price. For bonds between group companies, gains or losses on purchase are realized for consolidated statements but eliminated from individual company statements along with interest income and expense.
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Chapter 7: Intercompany Profits in depreciable Assets
Purpose:
Elimination and recognition of upstream/downstream intercompany profits on Depreciable
Assets Gain or loss from elimination of intercompany bond holdings
Intercompany Profits in Depreciable Assets
Gain or losses on intercompany asset sales is unrealized to the group until the assets is sold to an outside buyer or used in producing a product/service
Gain removed, reduced income on consolidated income From Gain on Asset, also reduce taxes to deferred income taxes Then reduce depreciation expense by gain/lifetime
Unrealized gain is “CONTRA ACCOUNT”
Summary of the Implications of Intercompany transactions in DEPRECIABLE ASSETS
Intercompany gain must be eliminated, and associated income taxes paid differed The assets must be adjusted to its historical costs Depreciation is restated based on the original costs and associated income taxes are recorded Accumulated depreciation is restated so it’s based on original cost Retained earnings is adjusted for cumulative after-tax effect of UNREALIZED gain or loss (gain or loss less incremental depreciation to date) “Realized” gain decreases depreciation, but have to recognized tax implication by adding Tax Initial Consolidation Intercompany Bondholding:
Profits from bonds are unrealized at the individual company level, but realized by the group since it occurred with outside parties Recognized these gains and losses on the consolidated statements Purchasing company reports investment in bonds as an asset on its separate entity balance sheet Issuing Company reflects the bond liability and records interest expense and any related amortization of premium/discount on its separate-entity statements Consolidation: “the intercompany bond has retired” at time of purchase on open market o Bond investment is eliminated against the bond liability Difference between acquisition and book value of bond recognizes as gain or loss on Consolidated statements HOWEVER, since from an individual POV these companies recognized the bond as being Active >Intercompany interest revenue received, and interest expense paid to be eliminated in the consolidated financial statements
Following Adjustments Required on the Consolidation Worksheet:
1. Eliminate intercompany bonds and record the gain on retirement. 2. Match the gain recognized to related income tax and expense 3. Eliminate the intercompany interest net of income tax 4.
Bond: Gain on the consolidated income statement does not appear on the statement of the parent. It appears on consolidated income statement because of the unequal elimination of the intercompany assets and liabilities in the preparation of the consolidated balance sheet.
Gain reported on the consolidated statements, not on the single-entity statements
Chapter 9:
Joint Arrangements:
Contract to undertake activity and jointly control that activity
If contributing assets, can recognize gain based on other party’s % in investment
Joint Operations: Each operator contributes the use of assets/resources to new activity to still owns assets/resources
Joint Venture: Arrangement where both parties have control and rights to net assets of arrangement. Contributes assets to the new separate legal entity. Can recognize as gain if there is commercial substance, gain % based on other parties’ % ownership.
IFRS: Joint Venture uses Equity Method
Recognizes share of income from joint venture as “income from Joint Venture” on Income statement and “investment in joint venture” on b/s Any share of intercompany asset profits is eliminated
Contribution to the Joint Venture
On date of formation, they contribute monetary assets instead of cash to get interest in joint venture Asset contributed has FV greater than CA in the records of the venturer
Deferred Income Taxes and Business Contributions
Temporary difference in CV for book purposes compared to tax purposes give rise to deferred income taxes which must be recognized in the consolidated financial statements. If Asset book value < Tax value, or Liability book Value > Tax value, deferred tax asset arises If asset book value > tax value, or liability book value < tax value, deferred tax liability arises Previous unrecognized operating loss carry forward of subsidiary may be recognized at the time of a business combination, either as a result of intercompany revenues or reduced costs as a result of the combination For Joint operation, the operator’s share of any intercompany assets profit is eliminated whether the sale was upstream or downstream No Deferred taxes are recognized for the difference between the tax base and the carrying amount for goodwill.
