All right! I think we are almost there. Just a few more smaller topics to cover.
Today, we will cover on “Tax effect on unrealised intragroup profits and losses” and “Intragroup dividends”
Without further delay, let’s jump straight into first topic.
Tax effect on unrealised intragroup profits and losses
We have discussed FRS 12 before in Part 3 of this series where during the initial fair value adjustment phase on acquisition date, as a result of new liability provisions or adjustment of land fair value etc. results in balance sheet adjustments where the other leg of FV adjustments hits Goodwill. Such adjustments leads to Deferred tax eg. an increase in legal provision will require an additional deferred tax asset figure when calculating the Goodwill.
This topic is a bit different in the sense that firstly, this is subsequent to acquisition date and not acquisition date itself. Secondly, Intragroup profit and loss will hit P&L (duh?!) and thus opening R/E will be involved. The concept however remains the same:
- If the recovery of or settlement of the carrying amount of an asset or liability have a future tax payment consequences, then a deferred tax exists
- The deferred tax should be treated in the same way how the underlying transaction is accounted for.
This topic can be summarised into 4 main permutations:
| Year | Profit | Double Entry |
| Current Year | Profit Decreased | DR Deferred Tax CR Tax Expense |
| Current Year | Profit Increased | DR Tax Expense CR Deferred Tax |
| Previous Year | Op. Profit Decreased | DR Deferred Tax CR Op. R/E |
| Previous Year | Op. Profit Increased | DR Op. R/E CR Deferred Tax |
The entries above serves as a general guide. The key is to always follow the underlying transaction. In our earlier example in Part 7 of our series, we say that unrealised profit for interco inventory sale is deemed as realised in the subsequent year before recalculating the URP again. Hence, Deferred tax must be calculated the same way. Here’s the logic:
| Year | Double Entry |
| Prev Year URP deemed realised | DR Op R/E CR Cost of Sale |
| Deferred Tax as per permutation 3 | DR Deferred Tax CR Op. R/E |
| *Deemed Deferred Tax realised | DR Tax Expense CR Deferred Tax |
| New Current Yr URP | DR Cost of Sale CR Inventory |
| Deferred Tax as per permutation 1 | DR Deferred Tax CR Tax Expense |
*An additional step to realise the deferred tax into P&L, just like the underlying previous year URP
Let’s visualise this with an example:
P acquired 80% of S in 2015, of which its R/E was $200. Since 2017, S sells goods to P at cost plus 33.33%. P’s stock at end of 2017 includes $80 that are bought from S. For 2018 the interco sales was $300, $200 of which remained with P at year end. Tax rate is 20% . Let’s simulate for 2018:
| Description | Workings | Double Entry |
| Prev Year URP deemed realised | 80 * (0.33/1..33) = $20 | DR Op R/E CR Cost of Sale |
| Deferred Tax as per permutation 3 | $20 * 20% = $4 | DR Deferred Tax CR Op. R/E |
| *Deemed Deferred Tax realised | $4 | DR Tax Expense CR Deferred Tax |
| New Current Yr URP | 200 * (0.33/1..33) = $50 | DR Cost of Sale CR Inventory |
| Deferred Tax as per permutation 1 | $50 * 20% = $10 | DR Deferred Tax CR Tax Expense |
| P | S | DR | CR | Consol Bal. | |
| Sales | 280 | 500 | 300 | 480 | |
| Less: Cost of Sales | 150 | 300 | 50 | 300 | 180 |
| 20 | |||||
| Gross Profit | 130 | 200 | 300 | ||
| Interest Income | – | – | – | ||
| Less: Distribution exp. | – | – | – | ||
| Less: Admin exp. | 30 | 70 | 100 | ||
| Op. Profit | 100 | 130 | 200 | ||
| Less: Interest Exp | – | – | – | ||
| PBT | 100 | 130 | 200 | ||
| Less: Tax | 30 | 40 | 4 | 10 | 64 |
| PAT | 70 | 90 | 136 | ||
| Other Comp. Inc | |||||
| FV Gain | – | – | – | ||
| Reval. Surplus | – | – | – | ||
| Total Comp. Inc | 70 | 90 | 136 | ||
| PAT attributable to: | |||||
| Shareholders of P 70 + (80%* [90-50+20-4+10]) | 122.8 | ||||
| NCI (20% * [90-50+20-4+10]) | 13.2 | ||||
| 136 | |||||
| Total Income attributable to: | |||||
| Shareholders of P 70 + (80%* [90-50+20-4+10]) | 122.8 | ||||
| NCI (20% * [90-50+20-4+10]) | 13.2 | ||||
| 136 |
| P | S | DR | CR | Consolidated Bal. | |
| Land | 100 | 50 | 150 | ||
| Investment | 240 | – | 240 | – | |
| Stock | 200 | 300 | 50 | 450 | |
| A/R | – | – | – | ||
| Bank | 160 | 150 | 310 | ||
| Deferred Tax | – | – | 4 | 4 | 10 |
| 10 | |||||
| 700 | 500 | 920 | |||
| Share Capital | 500 | 100 | 80 | 500 | |
| 20 | |||||
| Retained Earnings | 180 | 330-50+10-4+4 | 160 | 252 | |
| 58 | |||||
| A/P | 20 | 70 | 90 | ||
| Loan Payable | – | – | – | ||
| NCI | – | – | 20 | 78 | |
| 58 | |||||
| 700 | 500 | 920 |
Following is a breakdown on how the retained earnings + current year profits is being dissected:
| Pre-acquisition | Amt | P%/NCI% | P/NCI |
| Share capital | 100 | 80% | 80 |
| 20% | 20 | ||
| Retained Earnings | 200 | 80% | 160 |
| 20% | 40 | ||
| Post-acquisition (Before Current Year) | |||
| Retained Earnings (330-200-90) | 40-20+4 | 80% | 19.2 |
| 20% | 4.8 | ||
| Post-acquisition (Current Year) | |||
| Retained Earnings | 90-50+20-4+10 | 80% | 52.8 |
| 20% | 13.2 |
You can get the group’s R/E by adding P R/E + share of S Post R/E = 180 + 19.2 + 52.8 = 252
The 58 cancelled as NCI’s share of R/E is derived by S R/E * 20% = (330-50+10-4+4) * 20% = 58
Finally, the NCI of 78 is simply just share of S Share capital + S R/E = (100 + 330-50+10-4+4) * 20% = 78
On top of the deferred tax, I think this example is also a very good showcase how the upstream profits affect the Balance Sheet and PnL. You may wonder why in P&L the profits are allocated on the basis of [90-50+20-4+10] while in balance sheet it becomes [330-50+10-4+4]. I think the best way to explain this is because 330 is the S’s R/E that isn’t corrupted with past year’s upstream profit cancellation, so if you were to use the same PnL basis on Balance Sheet, it becomes double counting. PnL on the other hand, needs to reflect all past group adjustments since it is on periodic basis and not on YTD basis.
Intragroup Dividend
Dividends in Singapore is typically single tier, meaning it is taxed once at payer side and receiver does not get taxed again. Dividends generally, is not a very complicated topic. As dividends are typically declared at year end, so they end up being accrued instead of being paid out. The following are the typical cancellation entries to deal with them:
| Description | Double Entry |
| P&L side | DR Div Income CR Div Expense |
| Balance Sheet side | DR Div Payable (R/E) CR Div Receivable |
As you can see, the dividends adjustment doesn’t really hurt the P&L, the only noteworthy issue here is that it affects the retained earnings, which means it will flow to your Statement of Equity.
If the dividends payer is only a partially owned subsidiary, then the amount needs to be split according to the % and offset against NCI accordingly.
All materials produced on this website, including this article, is based on author’s best interpretation of accepted accounting standards and his own experience. Any information bias, inaccuracies, misstatements, obsolesce are unintentional and should strictly not be held liable against the author. The author is not responsible for any losses, monetary or non-monetary, as a result of using these materials.
Derrick How 