how would you calculate the adjustment for depreciation if a parent company own 80% of its subsidiary, subsidiary sold assets to parent for 2mil plus a mark up of 30%, and depreciation is 10%. I'm assuming initial depreciation was 200,000 but on consolidation I'm not sure what the depreciation should be or how to calculate it after intercompany sales and profits have been removed......
Most of the effect of this would be on the consolidated statement of financial position rather than the consolidated income statement.
Lets look ats whats happening here.
The subsidiary is transferring something to the parent. That means that the main adjustments that we need to make are in working 2 (net assets).
As it's inter company as you've correctly spotted it all needs to be unwound as it's not a legitimate profit.
It's quite obvious that the profit figure in the above is £600k and 10% depreciation on that would be 60k.
The depreciation that should have been born by the group on the asset was £200k (10% or £2m), the actual depreciation charged for this year will have been £260k (£2m *1.3 * 10%) so as mentioned above depreciation is overstated by £60k.
The asset should have been 2m it was sold internally at 2.6m so an overstatement of 600k that needs to be reversed from retained earnings and PPE in the SOFP. Of course, the depreciation on the 600k over deducted in error was 60k therefore in the working for net assets show a negative value of 600k for the current year to reverse the profit figure and a positive value of 60k to reverse the depreciation figure.
Note that if this had been the parent selling to the subsidiary then the calcualtions would have been done through retained eanings (working 5) rather than net assets (working 2).
For the subsidiary to parent scenario that you are handling here the 80%/20% element of this is taken care of by Working 2 feeding into Working 4 (NCI) and working 5 (Retained earnings) which will very much bring everything together is the financial statements with the correct apportionments.
Just to make sure that you are completely comfortable with working 2 lets assume a few figures in the absence of them in your question and show the workings (I've missed out W1 Group structure and W3 Goodwill).
Retained earnings of the parent are 6m
At acquisition share capital of the subsidiary was 2m, a retained earnings at that time were 4m
At the reporting date just to keep things simple lets say that the retained earnings are still the same (so that you will see only the effect of reversing the inter company profit on transfer of PPE).
The only other adjustments are for the mistated profit on PPE.
Working 2. Net Assets
Subsidiary
At Acquisition
At Reporting
Diff
000's
000's
000's
Share Capital
2,000
2,000
Retained Earnings
4,000
4,000
Adjustments
PPE
(600)
(600)
Depreciation on PPE
60
60
Total
6,000
5,460
(540)
Working 4. NCI
000's
At Acquisition
(20%*6m)
1,200
Post Acquisition
20% * Net assets
(108)
Total
1,092
Working 5 Retained earnings
000's
Retained earnings (parent)
(100%*6000k)
6,000
Retained earnings (Subsidiary)
80% * Net assets
(432)
Total
5,568
Hope that all makes sense and that I haven't made any silly mistakes because I did it late at night.
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
