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As part of consolidation procedures all inter-group transactions (assets, liabilities, revenues, expenses, etc) are eliminated in full.

In a scenario where Company X's 80% or more revenue is generated from related party Company Y, should this elimination still occur?

Would not the financial performance of Company X & Y be skewed as the expense incurred for this transaction would be solely with Company X while Company Y will be reflecting the revenue?

Specifically, when segment reporting is performed, Company X (being in a separate segment) would show a negative result while Company Y would end up with inflated profits.
in IFRS 10 - Consolidated Financial Statements by

1 Answer

0 votes
I would divide your question into 4 parts.
1) As part of consolidation procedures all inter-group transactions are required to be eliminated in full irrespective of Holding %age.
2)Yes, irrespective of Holding %age, This elimination still occur.
3) I think you are confused regarding consolidation process. When company X purchase some goods from company Y, this would be shown as purchase in Cost of Goods statement of Company X and the amount would be shown as slaes in Company Y`s Cost of Goods statement.During the consolidation process, this whole amount would be eliminated from consolidated accounts irrespective of Holding %age.and if @ end of Financial year, some stock being shown in financial statements of Company X, such Stock`s amount would be reduced by the rate of profit at which Company Y Charged to Company X and the 2nd effects of this entrty is to reduced the Retained Earnings by the same amount by which stock would be reduced being the Intercompany Profit.
4) Why Company X would show –tive result? When Company X purchase some goods from Company Y, such stock would be used in manufacturing process of goods, which are selling by Company X and the amount generated from such sales would be shown in revenue of Company X and this also would not be eliminated in consolidated accounts as these are sold to other companies. While in segment reporting, it is necessary to show revenue relating to inter company and intra company revenue.I donot know why Company X would show a negative result while Company Y would end up with inflated profits? Can you explain what confusion you are having in this point?
by Level 5 Member (11.3k points)