INVESTMENT ACCOUNTING:
Short-term and long-term investments by companies represent the strategic allocation of capital based on liquidity needs, risk tolerance, and growth objectives. Short-term investments focus on liquidity and capital preservation (under 1-3 years), while long-term investments focus on wealth accumulation and growth (over 3-5+ years).
1. Short-Term Investments by Companies (Marketable Securities)
Short-term investments, or marketable securities, are high-quality, liquid assets that a company intends to hold for a short period—usually 3 to 12 months, or within an operating cycle—to manage cash flow, earn returns on idle cash, or fund immediate requirements.
· Concept: To provide a safety cushion, ensure high liquidity for operational needs, and protect capital from inflation.
· Contents/Examples:
o Treasury Bills (T-Bills): Low-risk government debt with maturities under one year.
o Certificates of Deposit (CDs): Bank deposits with fixed terms, often providing higher interest than savings accounts.
o Commercial Paper: Unsecured, short-term debt issued by corporations to pay for inventory or payroll.
o Money Market Funds: Low-risk funds focused on short-term debt securities.
o High-Yield Savings Accounts: Used to park idle funds while earning modest interest.
· Key Characteristics: High liquidity, low risk, lower returns.
2. Long-Term Investments by Companies
Long-term investments are assets a company intends to hold for more than one year, often extending to decades, with the primary goal of generating long-term capital appreciation, income, or strategic influence.
· Concept: To maximize profits, accumulate wealth, and build capital reserves.
· Contents/Examples:
o Equity Shares: Investing in the stocks of other companies for capital appreciation and dividends.
o Bonds/Fixed Income: Long-term government or corporate bonds maturing in 10-30 years.
o Real Estate: Land or buildings held for capital appreciation or rental income.
o Equity Method Investments: Owning over 20% of another company's voting shares to exert significant influence.
o Mutual Funds/ETFs: Professionally managed portfolios that diversify risk over a long horizon.
· Key Characteristics: Lower liquidity, higher risk, higher potential returns.
3. Comparison of Investment Approaches
Feature | Short-Term Investing | Long-Term Investing |
Duration | < 1-3 Years | 5+ Years |
Primary Goal | Liquidity & Capital Safety | Growth & Capital Appreciation |
Risk Level | Low | High (diminishes over time) |
Liquidity | Very High | Low to Moderate |
Income Type | Interest-based | Dividends, Capital Gains |
Balance Sheet | Current Assets | Non-Current Assets |
4. Strategic Content & Management
Companies must strike a balance, as both types are crucial for a healthy portfolio.
· Diversification: Spreading risks across different asset classes to handle market fluctuations.
· Active vs. Passive Management: Short-term investments require active monitoring and quick turnover, whereas long-term investments often follow a "buy and hold" strategy.
· Taxation: Short-term gains are typically taxed at higher rates (ordinary income), whereas long-term gains often enjoy lower tax rates.
· Risk Management: Using hedging strategies like derivatives to protect against volatility.
In the US CMA Part 1 exam (Financial Planning, Performance, and Analytics), investment topics are primarily covered under Section A: External Financial Reporting Decisions (Accounting for Investments) and indirectly within Section C: Performance Management (Return on Investment).
Here are the important notes and key concepts regarding investments in Part 1:
1. Classification of Investments (Debt & Equity)
Investments are classified based on the intent of management and the percentage of ownership.
· Equity Securities (<20% ownership): Carried at Fair Value through Net Income (FVTNI). Changes in fair value are recognized in the income statement.
· Equity Securities (20% - 50% ownership): Equity Method. The investor recognizes their share of the investee’s earnings, which increases the investment account. Dividends received reduce the investment account.
· Equity Securities (>50% ownership): Consolidation. The financial statements of the subsidiary are combined with the parent.
· Debt Securities (Held-to-Maturity): Reported at Amortized Cost.
· Debt Securities (Trading): Reported at Fair Value, with unrealized gains/losses in net income.
· Debt Securities (Available-for-Sale): Reported at Fair Value, with unrealized gains/losses in Other Comprehensive Income (OCI).
2. Key Accounting Concepts for Investments
· Fair Value Method: Investments are marked-to-market at the balance sheet date.
· Impairment: If an investment's value declines below its carrying amount and the decline is permanent, it must be written down.
· Cash Flow Classification: Purchase/sale of investments are generally classified as Investing Activities on the Cash Flow Statement.
3. Investment Valuation in Financial Reports
· Investments in Debt/Equity: Assets must be properly valued on the Balance Sheet to reflect current financial health.
· Revenue Recognition: Understanding how income from investments (interest, dividends) is recognized.
4. Important Tips for the Exam
· Distinguish between methods: Know when to use the fair value method vs. the equity method based on the % of ownership.
· Focus on Impact: Understand how purchasing, selling, or revaluing an investment affects the Income Statement and Balance Sheet.
· Study Materials: Review the dedicated lectures on investments, debt securities, and equity securities.
Note: While Capital Budgeting (NPV, IRR) is a major investment topic, it is typically covered in CMA Part 2.
Investments are classified by tenure (Short-Term/Long-Term) or accounting intent (Trading, Available-for-Sale, Held-to-Maturity). Short-term/trading assets (<1 year) prioritize liquidity and fair value, while long-term/held-to-maturity assets focus on capital growth or interest income. Equity offers higher risk/return, whereas debt provides lower-risk, fixed income.
Investment Classifications by Type and Purpose
· Debt Securities: Include bonds, treasury bills, and debentures. They are fixed-income instruments suitable for capital preservation and regular income, often considered lower risk.
· EXAMPLE 12% 5 YEARS REDEEMABLE DEBENTURE , NOMINAL VALUE 10,00,000$, INTEREST PAYABLE SEMI ANNUALLY.
· INTEREST RATE(COUPON RATE)=12% PER ANNUM , INTEREST IS FIXED INCOME , (WE CONSIDERED IN ACCOUNTS AS FINANCE COSTS). INTEREST @12% ON NOMINAL VALUE = 10,00,000*12%=1,20,000$ PER YEAR , SEMI ANNUALLY , IT MEANS INTEREST PAYABLE AFTER EVERY 6 MONTHS =120,000*6/12=60,000$ ON 30TH JUNE & 60.000 DEC 31
· THIS DEBENTURE IS TREATED AS INVESTMENT IN :HELD TO MATURITY (HTM), SINCE IT IS REPAY AFTER FIXED TENURE PERIOD OF 5 YEARS , REDEEMABLE/PAYABLE TO INVESTORS ON DUE DATE.
· Equity Shares: Represent ownership in a company. These are typically held long-term for capital appreciation, carrying higher risk and volatility compared to debt.
Accounting Classifications (Business Context)
· Trading Securities (Short-Term) BUY & SELL: Purchased with the intent to sell within a short period for profit. Reported at fair value, with gains/losses impacting the income statement. DEBT +EQUITY SHARES, IT IS ACCOUNTED IN CURRENT ASSETS.
· Held-to-Maturity (HTM) Securities (Long-Term): Debt securities the company intends to hold until maturity. Reported at amortized cost. IT IS ACCOUNTED UNDER NON CURRENT ASSETS.
· Available-for-Sale (AFS) Securities: Securities that do not fit the trading or HTM categories. They can be long or short-term, reported at fair value with unrealized gains/losses shown in equity(OTHER COMPREHENSIVE INCOME OCI).
Short-Term vs. Long-Term
· Short-Term (< 1 Year): Focus on liquidity, managing cash flow, and low risk (e.g., money market instruments).
· Long-Term (> 1 Year): Focus on wealth accumulation, growth, and long-term financial goals, usually involving higher risk
Investments are classified based on management intent and maturity: Trading (short-term, fair value in net income), Available-for-Sale (short/long-term, fair value in Other Comprehensive Income), and Held-to-Maturity (long-term debt, amortized cost). Short-term focuses on liquidity (<1 year), while long-term seeks growth (>1 year).
Key Investment Classifications
· Trading Securities: Bought specifically to sell in the short term for a profit. Valued at fair value, with unrealized gains/losses reported in net income.
· Available-for-Sale (AFS) Securities: Debt or equity securities not classified as trading or held-to-maturity. Recorded at fair value on the balance sheet, with unrealized gains/losses reported in Other Comprehensive Income (OCI).
· Held-to-Maturity (HTM) Securities: Debt securities (e.g., bonds) the company has the positive intent and ability to hold until maturity. Reported at amortized cost, not fair value.
· Equity Shares: Represent ownership (stocks). Usually classified as Trading or AFS. They cannot be Held-to-Maturity.
· Debt Securities: Represent loans (bonds, commercial paper). Can be classified as Trading, AFS, or HTM.
Short-Term vs. Long-Term
· Short-Term Investments: Held for less than one year, primarily for managing cash flow and ensuring liquidity (e.g., trading securities).
· Long-Term Investments: Held for more than 12 months, intended for strategic growth or income.
· Valuation Changes: Trading securities are adjusted to fair value through profit/loss, while HTM are not adjusted for market changes.
Common Accounting & Analysis Questions
· Where are unrealized gains/losses for AFS securities reported? In Other Comprehensive Income (OCI).
· Which security type is not adjusted for market price changes? Held-to-Maturity (HTM) securities.
· Can equity securities be classified as HTM? No, because they do not have a maturity date.
· How are trading securities reported on the balance sheet? At fair value, and they are usually classified as current assets.
· What is "tainting" in HTM? Selling HTM securities before maturity may disqualify other securities from being classified as HTM, as it calls into question the "intent and ability" to hold them.
INVESTMENT IN ASSOCIATES:
Under US GAAP, investments in associates—where an investor has significant influence but not control—are typically accounted for using the equity method, generally presumed with 20%–50% ownership. The investment is initially recorded at cost and subsequently adjusted for the investor's share of the investee’s earnings, losses, and dividends.
Key Aspects of Investment in Associates (US GAAP)
- Significant Influence Criteria: While 20%–50% ownership is the standard, significant influence can exist below 20% based on factors like board representation, policy-making participation, or technological licensing.
- The Equity Method:
- Initial Measurement: Recorded at cost.
- Subsequent Measurement: The carrying amount increases by the investor's share of net income and decreases by dividends received and the share of net losses.
- Earnings Recognition: The investor reports its share of the associate’s net income as a single line item in the income statement.
- Acquisition Differential: The difference between the cost of the investment and the underlying equity in the net assets of the investee is often amortized over the life of the related assets (e.g., equipment).
- Impairment: If the fair value of the investment falls below its carrying amount and the decline is considered other-than-temporary, an impairment loss must be recognized.
- Alternatives: If the investor cannot exert significant influence (often <20% ownership), the investment is usually accounted for under the fair value method (ASC 321), where changes in fair value are recognized in net income.
Comparison with IFRS
- Joint Ventures: US GAAP requires the equity method, whereas IFRS 11 restricts it, and IFRS generally uses the equity method for joint ventures, but allows for more complex treatments.
- Fair Value Option: Under US GAAP (ASC 825), certain investments that would otherwise use the equity method may be designated to be measured at fair value, similar to some IFRS exemptions for venture capital organizations.
📊 Investment in Associates (Equity Method) – Key Points (US GAAP)
1. 📌 Meaning of Associate
- An associate is an entity over which the investor has significant influence but not control.
- Generally presumed when ownership is:
- 20% to 50% of voting stock
2. 📌 Significant Influence Indicators
Even if ownership is <20%, influence may exist if:
- Representation on board of directors
- Participation in policy decisions
- Material intercompany transactions
- Exchange of managerial personnel
3. 📌 Accounting Method – Equity Method
Initial Recognition Recorded at cost
Subsequent Measurement
Investment account is adjusted for:
- Investor’s share of net income → Increase investment
- Investor’s share of loss → Decrease investment
- Dividends received → Reduce carrying amount
4. 📌 Basic Journal Entries
(1) Share of Profit
Investment in Associate Dr
To Income from Associate
(2) Share of Loss
Loss from Associate Dr
To Investment in Associate
(3) Dividend Received
Cash Dr
To Investment in Associate
5. 📌 Goodwill Treatment
- Difference between purchase price and investor’s share of net assets:
- Included in investment account
- Not shown separately
- Not amortized (but tested for impairment)
6. 📌 Excess Fair Value Adjustments
If purchase price > book value:
- Allocate to identifiable assets/liabilities
- Depreciate/amortize based on asset life
- Adjust investor’s share of income accordingly
7. 📌 Impairment
- If decline is other-than-temporary:
- Write down investment to fair value
- Loss recognized in income
8. 📌 Loss Recognition Limit
- Investor stops recognizing losses when:
- Investment balance becomes zero
- Exception:
- If investor has guaranteed obligations or committed support
9. 📌 Reporting in Financial Statements
- Shown as non-current asset
- Income shown as:
- “Equity in earnings of affiliate”
10. 📌 When Equity Method is NOT Used
Switch to other methods when:
- No significant influence → Cost/Fair Value method
- Control (>50%) → Consolidation
11. 📌 Unrealized Intercompany Profit
- Must eliminate investor’s share of:
- Upstream transactions (associate → investor)
- Downstream transactions (investor → associate)
12. 📌 Disclosure Requirements
- Name of associate
- % ownership
- Accounting policies
- Summarized financial information
13. 📌 Key Exam Traps ⚠️
- Dividends are NOT income (they reduce investment)
- Profit increases investment, not cash
- Ownership % ≠ only criteria for influence
- Losses limited to investment value
14. 📌 Quick Summary Table
Aspect | Treatment |
Ownership | 20%–50% |
Method | Equity Method |
Profit Share | Increase investment |
Dividend | Reduce investment |
Loss | Reduce investment |
Goodwill | Included in investment |
Reporting | Non-current asset |
INVESTMENT IN SUBSIDIARY COMPANY:
Under US GAAP, investments in subsidiaries (typically $>50\%$ voting interest) are accounted for through consolidation. The parent combines the subsidiary’s assets, liabilities, and results of operations into its own, while eliminating intercompany transactions. Noncontrolling interests (NCI) are recorded separately in equity.
Key Aspects of US GAAP Subsidiary Accounting
- Control Requirement: Consolidation is required when a parent has a "controlling financial interest," usually meaning ownership of more than 50% of the voting stock, although the Variable Interest Entity (VIE) model may require consolidation even without voting control.
- Consolidation Process:
- Elimination: All intercompany transactions, such as sales, loans, and management fees between the parent and subsidiary, must be eliminated to reflect the entity as a single economic unit.
- NCI Measurement: The portion of equity not owned by the parent is recognized as Noncontrolling Interest (NCI) in the consolidated balance sheet.
- Subsequent Measurement: Changes in the investment amount (purchasing more shares or selling some) are adjusted on the parent’s books, and the NCI is updated for its share of profits and losses.
- Exceptions: Investment companies (as defined in ASC 946) may be exempt from consolidation, instead reporting their investments at fair value.
- Alternative (Separate Parent Statements): In separate company financial statements (not consolidated), the parent may use the cost method or equity method, although these are eliminated in the final consolidated financials.
- For more specific guidance, check the deloitte.com website for detailed information regarding intercompany matters.
📊 Investment in Subsidiary Companies – Key Points (US GAAP)
1. 📌 Meaning of Subsidiary
- A subsidiary is an entity controlled by another entity (parent).
- Control generally exists when:
- Ownership > 50% voting shares
2. 📌 Concept of Control
Control exists when investor has:
- Power over investee
- Exposure to variable returns
- Ability to affect those returns
👉 Governed by:
3. 📌 Accounting Method – Consolidation
- Parent must prepare consolidated financial statements
- Treat parent + subsidiary as a single economic entity
4. 📌 Consolidation Basics
- Combine:
- Assets
- Liabilities
- Revenues
- Expenses
- Line-by-line aggregation
5. 📌 Elimination Entries (Very Important ⚠️)
(1) Investment vs Equity Elimination
- Remove:
- Investment in subsidiary (parent books)
- Equity of subsidiary (share capital, reserves)
(2) Intercompany Transactions Elimination
Eliminate:
- Intercompany sales
- Intercompany receivables/payables
- Unrealized profit in inventory
- Intercompany dividends
6. 📌 Non-Controlling Interest (NCI)
- Portion not owned by parent
Treatment:
- Shown in:
- Equity section of balance sheet
- Share of profit:
- Allocated separately in income statement
7. 📌 Goodwill / Bargain Purchase
Calculation:
- NCI
– Fair value of net identifiable assets
👉 If positive → Goodwill
👉 If negative → Gain on bargain purchase (P&L)
8. 📌 Fair Value Adjustments
- At acquisition:
- Assets & liabilities recorded at fair value
- Depreciation/amortization adjusted accordingly
9. 📌 Post-Acquisition Profits
- Split into:
- Pre-acquisition → Capital profit
- Post-acquisition → Revenue profit
10. 📌 Intra-group Unrealized Profit
- Must eliminate 100% (not just parent share)
- Applies to:
11. 📌 Dividend Treatment
- Dividends from subsidiary:
- Eliminated in consolidation
- Not shown as income
12. 📌 Reporting Dates
- If different:
- Adjust for significant transactions
- Gap should not exceed 3 months
13. 📌 Uniform Accounting Policies
- Parent & subsidiary must use:
- If different → adjustments required
14. 📌 When Consolidation is NOT Required
Exceptions:
- Temporary control
- Subsidiary under severe restrictions
- (Rare under US GAAP)
15. 📌 Variable Interest Entities (VIE) ⚠️
- Even without majority ownership:
- Consolidation required if primary beneficiary
- Key concept under ASC 810
16. 📌 Step Acquisition
- If control obtained in stages:
- Previously held interest remeasured at fair value
- Gain/loss recognized
17. 📌 Deconsolidation
When control lost:
18. 📌 Disclosure Requirements
- Subsidiary details
- NCI information
- Consolidation policies
- Restrictions on cash flows
19. 📌 Key Exam Traps ⚠️
- Consolidation ≠ simple addition (requires eliminations)
- NCI shown in equity, not liability
- Unrealized profit eliminated fully
- Dividend is not income in consolidation
- Goodwill not amortized
20. 📌 Quick Summary Table
Aspect | Treatment |
Ownership | >50% |
Method | Consolidation |
Financials | Combined line-by-line |
Investment | Eliminated |
NCI | Equity |
Goodwill | Recognized |
Intercompany | Eliminated |
🎯 Quick Comparison Insight
Feature | Associate | Subsidiary |
Ownership | 20–50% | >50% |
Method | Equity Method | Consolidation |
Control | No | Yes |
Financials | Single line | Full combination |
A LTD PURCHASED 60,000 EQ SHARES OF D LTD (100,000 EQ SHARES )
=(60,000/100,000)*100=60% IT MEANS A LTD HAVE CONTROL OVER THE OPERATING & FINANCIAL POLICIES OF D LTD SINCE A LTD HOLD & OWNED MORE THAN 50% EQUITY STAKE IN D LTD ON B/SHEET DATE (YEAR END).
HERE A LTD IS PARENT CO (HOLDING CO)OF D LTD & D LTD IS SUBSIDIARY COMPANY OF A LTD
OTHER 40% EQUITY STAKE IN D LTD IS OWNED BY MINORITY INTEREST (NON CONTROLLING INTEREST=NCI)
HERE A LTD(PARENT CO ) PREPARE ADDITIONAL FINANCIAL STATEMENT CALLED AS GROUP FIN STATEMENT OR CONSOLIDATED FIN STATEMENT . LINE BY LINE ADDED TOGETHER EXAMPLE SALES 100 LAKHS OF A LTD , 40 LAKHS OF D LTD , IN CONSOLIDATED/GROUP INCOME STATEMENT WE SHAW 100+40=140 LAKHS SALES/REVENUE .
THIS IS CONSOLIDATED METHOD THAT APPLIED ONLY WHEN THER IS PARENT SUBSIDIARY RELATIONSHIP.
GROUP FINANCIAL STATEMENT COMPRISES : GROUP INCOME STTAEMENT , GROUP EQUITY , GROUP B/SHEET & GROUP CASHFLOW STATEMENT
HOW TO COMPUTE PURCHASED GOODWILL (GOODWILL ON ACQUISITION):PARENT COMPANY CALCULATE GOODWILL ON DATE OF ACQUISITION
GOODWILL= AMT PAID BY PARENT CO & NCI TOGETHER > FAIR VALUE OF NET ASSETS OF SUBSIDIARY CO ON DATE OF ACQUISITION
EXAMPLE 1: A LTD AQUIRED 60% EQUITY STAKE IN B LTD FOR 40,00,000 & FAIR VALUE OF INVESTMENT OF NCI(40%) ON THAT DATE IS 25,00,000. ON THAT DATE FAIR VALUE OF NET ASSETS OF B LTD IS 60,00,000
COMPUTE PURCHASED GOODWILL.
ANSWER : GOODWILL ON ACQUISITION:
CONSIDERATION TRFD :
AMT PAID BY A LTD 60% 40,00,000
+NCI FAIR VALUE 40% +25,00,000
= TOTAL CONSIDERATION TRFD 100% =65,00,000
LESS : FAIR VALUE OF NET ASSETS OF
B LTD ON DATE OF ACQUISITION (-)60,00,000
= POSITIVE GOODWILL /PURCHASED GW 5,00,000
EXAMPLE 2: P LTD AQUIRED 80% EQUITY STAKE IN Q LTD FOR 55,00,000 & FAIR VALUE OF INVESTMENT OF NCI(20%) ON THAT DATE IS 22,00,000. ON THAT DATE FAIR VALUE OF NET ASSETS OF Q LTD IS 70,00,000
COMPUTE PURCHASED GOODWILL.
EXAMPLE 3 Entity C acquired 80% of the outstanding common stock of Entity D for $192,000. Entity D’s acquisition date
fair values of identifiable assets and assumed liabilities were $350,000 and $140,000, respectively. Fair value of net assets of d ltd is 350,000-140,000=210,000.The acquisition-date fair value of NCI was $48,000.compute goodwill on acquisition
answer : Consideration transferred 80% $192,000
+ Noncontrolling interest 20% 48,000
=total consideration trfd 100% 2,40,000 Less:on Acquisition-date fair value of
identifiable net assets of subsidiary co
(Assets – Liabilities) acquired:
Identifiable Assets $350,000
(-)assumed Liabilities (140,000) (210,000)
=purchased Goodwill $ 30,000
Purchased /positive goodwill are showned in group balancesheet under non current assets as intangible fixed assets . such purchased goodwill are subject to impairement test on each year end date .
If goodwill at the end of the year, suppose 28,000 then there is impairement loss =30,000-28,000=2000
J entry … impairement loss a/c dr 2000
To goodwill a/c cr 2000
Bargain purchase / negative goodwill:
Example 4: p ltd acquired 90,000 equity shares of q ltd ( total o/s equity shares 100,000), for $700,000 , on that date :FAIR VALUE of investment of minority interest(NCI=10%) are 200,000$. And fair value of identifiable total assets & assumed liabilities of q ltd are 15,00,000 & 500,000 respectively. Compute amount of goodwill or bargain purchase of p ltd on date of acquisition
Answer : p ltd acquired 90,000 eq shares of q ltd 90,000/100,000=90% so p ltd have control over op & fin policies of q ltd , lets compute positive /negative goodwill on date of acquisition:
Consideration trfd by:
P ltd 90% 700,000
+nci fair value given 10% 200,000
Total consideration 100% =900,000
Less ;fair value of net assets of q ltd
On date of acquisition:
Identifiable total assets 15,00,000
(-) assumed liabilities (-)500,000 (-)10,00,000
=bargain purchased 100,000
Bargain purchased is negative goodwill, when consideration trfd is lesser than fair value of net assets of subsidiary company
Accounting treatment of Bargain purchased 100,000$ is as under : it is added into Group income statement (its non op income)
key consolidation adjustments under US GAAP, especially focusing on:
✔ Unrealised profit in closing inventory
✔ Intercompany owing (receivables/payables)
✔ Line-by-line addition (consolidation mechanics)
📊 1. Line-by-Line Addition (Core Principle)
As per ASC 810:
👉 Parent + Subsidiary financials are combined item-wise
✔ What is added?
- Assets (Cash, Inventory, PPE)
- Liabilities (Payables, Loans)
- Income & Expenses
👉 This is called “full consolidation”
⚠️ Important:
- Before final totals → elimination entries must be passed
📊 2. Unrealised Profit in Closing Inventory (Very Important)
📌 Concept
- Occurs when:
- Goods sold within group remain unsold at year-end
- Profit included is not realised from group perspective
📌 Example
- Parent sells goods to subsidiary:
- Cost = 100
- Selling price = 150
- Subsidiary still holds inventory
👉 Unrealised profit = 50
📌 Adjustment Entry
Sales (or Retained Earnings) Dr
To Inventory
👉 Reduce:
- Group profit
- Closing inventory
📌 Key Rules ⚠️
✔ Eliminate FULL unrealised profit
- Even if NCI exists → eliminate 100%
✔ Direction Matters
(1) Downstream (Parent → Subsidiary)
(2) Upstream (Subsidiary → Parent)
- Adjustment affects:
- Subsidiary profit
- NCI share also impacted
📌 Impact Summary
Item | Effect |
Inventory | Reduced |
Profit | Reduced |
NCI | Affected only in upstream |
📊 3. Intercompany Owing (Receivables & Payables)
📌 Concept
- Parent shows receivable
- Subsidiary shows payable
👉 From group perspective → internal → must be removed
📌 Adjustment Entry
Accounts Payable Dr
To Accounts Receivable
📌 Additional Cases
✔ Goods in Transit
- If goods dispatched but not received:
- Adjust inventory + payable
✔ Cash in Transit
- If payment sent but not received:
- Adjust cash and receivable/payable
📌 Key Rule ⚠️
- Eliminate 100% balances
- No impact on profit (only balance sheet)
📊 4. Intercompany Sales (Related Adjustment)
📌 Remove Internal Sales
Sales Dr
To Cost of Goods Sold
👉 Prevent overstatement of:
📊 5. Combined Illustration Flow (Exam Approach)
Step 1: Line-by-line addition
Step 2: Pass elimination entries:
- Investment vs equity
- Intercompany balances
- Intercompany sales
- Unrealised profit
- NCI adjustment
📊 6. Quick Summary Table
Adjustment | Entry | Impact |
Line-by-line | Add all items | Before eliminations |
Unrealised profit | Dr Profit / To Inventory | Reduce profit & inventory |
Intercompany owing | Dr Payable / To Receivable | Reduce assets & liabilities |
Intercompany sales | Dr Sales / To COGS | Reduce turnover |
Upstream profit | Affects NCI | Yes |
Downstream profit | No NCI effect | Yes |
⚠️ Exam Traps
- Unrealised profit is fully eliminated (100%)
- Inventory must be shown at cost to group
- Intercompany balances NEVER appear in consolidated BS
- NCI affected only in upstream transactions
- Consolidation is NOT simple addition
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