![]() To understand the treatment, we need to go to the basics of accounting, where the Business Entity Concept has been given and which is followed in the whole accounting profession, all over the world. Now, in first example, when the organization prepares its whole entity level financial statements and in second example, when Idea Cellular Limited prepares its Consolidated financial statements, what will be the treatment of inter-unit sales made at profit and the treatment of investment in the equity shares of Vodafone India Limited. At the same time, Vodafone India Limited will include Rs.100 Crores in its equity share capital. Now, Idea will show Rs.100 Crores in its balance sheet under the head ‘Investment in the equity shares’ of Vodafone. Let’s suppose Idea proposes to buy Vodafone for Rs.100 Crores. ![]() ![]() Let’s suppose the net assets value of Vodafone India Limited was Rs.100 Crores, i.e., Idea will be required to pay a minimum of Rs.100 Crores to buy Vodafone Company. Being the majority shareholder, Idea will be the owners of Vodafone. Let’s suppose Idea Cellular India Limited purchases majority (say, 51%) of the shares of Vodafone India Limited. I would like to give another example which we need to consider for understanding some other intercompany transactions. In other way, what this means that the organization starts earning profit from the inter-unit / inter-company transactions. In fact, sometimes the management views its organization’s units as independent reporting units and hence, mandates them to act as an individual profit center and any sale made from one unit to another unit will include some profit element. Any transactions happened between these units of an entity may be effected at cost. The management of an organization might wish to maintain separate accounting records at each branch or unit level of the organization. Understanding of elimination in the consolidation procedure – So let’s look into the elimination entries. Also, we will try to understand various types of the elimination entries and steps followed in elimination entry identification and its way into consolidation procedure.Īfter understanding from a point of an accountant, we will also try to see from the point of view of auditors, who cross-examines from independent sources and methods the correctness and accuracy of the elimination entries. This article will help you understand what principle guides the elimination of certain transactions before the preparation of consolidated presentation of financial data of an entity. When financial reporting is required at group level, meaning at Consolidated Level where all units of the entity will be regarded as a single whole unit, to avoid the misrepresentation of consolidated entity’s financial statement, occurrence of intercompany transactions need to be removed by adopting predefined steps for consolidation, which have been discussed in this article elsewhere. Inventory (stock) transfer from one unit to another unit, whether on cost-plus-margin method or at fair value or at cost, etc. ![]() Purchase and sale of goods and/or services.To give an example of what these ‘intercompany transactions’ may involve, it involves – Though, sometime transactions may occur between units of one legal entity (what has been referred to as ‘inter-unit / intercompany transactions’ in commercial sense). In the commercial world, generally what we see is transactions occurring between two unrelated entities. ![]()
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