Why is it necessary to adjust for intragroup transactions in consolidation financial statements?

Answer and Explanation: It is necessary to make adjustments for intra-group transactions because it would otherwise lead to double-counting the effect of a transaction.

What is intra-group trading?

Intra-group transactions are the transactions between the companies of a group. These transactions must be removed from the Consolidated accounts so as not to inflate the Net income of the Parent company and of the companies of the group.

Why are intra-group transactions eliminated from consolidated accounts?

This means that the related revenues, cost of goods sold, and profits are all eliminated. The reason for these eliminations is that a company cannot recognize revenue from sales to itself; all sales must be to external entities.

What is an intra group loan?

When we refer to a “normal on demand intra-group loan”, we mean a loan made by a subsidiary to its parent company or to a fellow subsidiary that is repayable immediately on demand by the lender, where, at the time the loan is made, the board of directors of the subsidiary properly considers the borrower’s financial …

What are intragroup balances?

Intra-Group Balances means all sums owed by or to Marston to or from any other members of the Seller’s Guarantor’s Group at Completion save for those in respect of trade creditors arising through normal business transactions.

What is an intragroup transaction and why do we need to know about them?

Intra-group transactions: definition These are financial or commercial transactions which involve two companies of the same group simultaneously. The most common example is the issuing of a sales invoice for the supply of services.

What is intercompany eliminations in consolidation?

Intercompany elimination is the process that a parent company goes through in order to remove transactions between subsidiary companies in a group. Parent companies complete intercompany eliminations when they’re preparing consolidated financial statements.

Are intercompany loans financial instruments?

If the intercompany financing was previously considered a debt instrument by the lender, but now meets the definition of an equity instrument (that is, it is accounted for as an investment in a subsidiary), the intercompany financing becomes part of the parent/lender’s investment in the subsidiary.

What is intra-group interest?

In an intra-group setting, there are instances where a loan or a portfolio of loans is transferred between entities. Such transfers need to take place at market values to reflect third-party behavior, given that values can change with time as interest rates change.

What are intra-group transactions?

Also Intra-company transactions (transactions with related companies outside the scope of consolidation) may be netted, showing only the remaining receivable or payable with that related company. Any profits resulting from intra group transactions are eliminated from the consolidated accounts.

What is the difference between intra-group and consolidated financial statements?

Intra-group transactions are not with third parties outside the scope of consolidation (this means the group of companies consolidated to one unit). In the Consolidated Financial Statements only balances and transactions remain with third parties outside the scope of consolidation.

What are the tax implications of intra-group loan financing?

Many tax authorities have recently been focused on the credit risk ratings of intra-group loan financing transactions, both in the O&G and other industries. The pricing of a loan impacts both the borrowing jurisdiction (in terms of the deductions that it can claim) and the lending jurisdiction (by virtue of the income that it receives.)

What are the alternatives to intra-group loans?

Realistic alternatives to intra-group loans could be, for instance, bond issuances, loans which are uncontrolled transactions, deposits, convertible debentures and commercial paper. It may also be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the counterparty.