Consolidation posting mark up

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Jonny
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Consolidation posting mark up

Post by Jonny »

Hi
I have below query.
There are two companies X and Y that are part of the same Group. X owns and controls Y with 51% of the shares.

Case A
X sells an asset to Y with a mark-up of 100. The tax rate is 25%.

1) the gain of 100 is eliminated at consolidated level against the asset (gain@asset 100)
2) DTA of 25 will be created (DTA@P&L taxes 25)
net effect of the posting 75.
would you post the minority effect of 36.75 on day 1? ie higher group profit
Is the 49% gain of X realized in day 1 or during in the use full life of the asset?

Case B
Instead
Y sells an asset to X with a mark-up of 100. The tax rate is 25%.
Same posting of case A
would you leave the minority effect of 36.75 (minority consolidating Y) on day 1? ie lower group profit
Is the 49% gain of Y realized in day 1 or during in the use full life of the asset?

Thanks
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Marek Muc
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Re: Consolidation posting mark up

Post by Marek Muc »

in case A, there is no impact on NCI (non-controlling interest) as the gain was realised by X (fully owned by the group)

in case B, you split the elimination of 75 between NCI and controlling shareholders so that no gain is realised by NCI
Jonny
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Re: Consolidation posting mark up

Post by Jonny »

ok makes sense to me.

Thanks

I just wanted to highlight that, in case A, during the useful life of the asset the company Y will have a lower profit of 75 consolidated in the Group profit at 51% (-38.25) while the reversal of posting of the mark up will be in full + 75. Net effect for the Group +36,75 equal to the 49% of the profit
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Marek Muc
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Re: Consolidation posting mark up

Post by Marek Muc »

I don't get your highlight. Y will post additional depreciation of 75 over the useful life, and you will reverse this additional depreciation in consolidation journal, right? Both entries will be attributed to NCI the same way, so the effect on NCI will be nil
Jonny
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Re: Consolidation posting mark up

Post by Jonny »

Marek Muc wrote: 05 Jan 2021, 12:19 I don't get your highlight. Y will post additional depreciation of 75 over the useful life, and you will reverse this additional depreciation in consolidation journal, right?
correct
Marek Muc wrote: 05 Jan 2021, 12:19
Both entries will be attributed to NCI the same way, so the effect on NCI will be nil
If I reverse the initial posting I cannot calculate or reverse NCI. The initial posting must go to zero at the end of the use full life. IMO the 49% of the profit is realized.
what are your thoughts?
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Marek Muc
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Re: Consolidation posting mark up

Post by Marek Muc »

you don't reverse initial posting
you reverse additional depreciation charge booked by Y in the coming years
Jonny
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Re: Consolidation posting mark up

Post by Jonny »

I've talked with the auditors. Also, in their opinion we need to reverse to initial posting. At the end of the day the NCI (49%) is realized.

Most of the consolidation software, allocating the posting to the subsidiary, create a minority. This should be corrected manually.

Think it this way: If X invoices to Y a service with a markup of 100 (75 less taxes). Y expenses the cost immediately. The 49% of the markup would be realized for the Group. An amortized asset is an expensed over time.
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Marek Muc
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Re: Consolidation posting mark up

Post by Marek Muc »

ok it makes sense to me that the NCI will decrease as a result of this transaction and controlling interest will increase,

I'm not clear how you plan to achieve this, will you manually reallocate the elimination of the gain made by X between NCI and owners of the group? so that it looks something like this?

consolidated net income: 0 (intragroup gain eliminated)
net income attributable to owners of the parent: 49% x intragroup gain
net income attributable to non-controlling interests: -49% x intragroup gain
Jonny
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Re: Consolidation posting mark up

Post by Jonny »

Yes.
You do not need to make any allocation. The initial posting will be reversed without considering the minority. The higher cost (markup) is in the result of the subsidiary. The result will be allocated 49% to the NCI.
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Marek Muc
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Re: Consolidation posting mark up

Post by Marek Muc »

So effectively what amount will you show as consolidated net income (after taking all entries into account) and what amounts will be shown as attributable to owners of the parent and to non-controlling interests?
Jonny
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Re: Consolidation posting mark up

Post by Jonny »

At the end of useful life the group profit will be 36.75 (49% of 75) and the NCI a loss of 36.75
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Re: Consolidation posting mark up

Post by Marek Muc »

I asked for 3 amounts and you gave only two and I'm not sure which one is missing :)

Group net income: ?
net income attributable to owners of the parent: ?
net income attributable to non-controlling interests: ?
Jonny
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Re: Consolidation posting mark up

Post by Jonny »

Is zero. The posting is reversed. :D

Group net income: 0
net income attributable to owners of the parent: +36.75
net income attributable to non-controlling interests: -36.75
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Re: Consolidation posting mark up

Post by Marek Muc »

Makes sense :)
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