Unit 2: International taxation and consolidation
International Accounting notes · PTU syllabus (MCOPAF311-18)
On this page
Unit summary
Multinational groups trade within themselves and consolidate many entities. This unit covers international transfer pricing, IFRS 10 consolidated financial statements, IAS 27 separate financial statements, IFRS 3 business combinations, and IAS 28 investments in associates and joint ventures.
After this unit you can
- Explain international transfer pricing methods and regulations
- Explain control and consolidation under IFRS 10 and separate statements under IAS 27
- Explain the acquisition method under IFRS 3
- Explain the equity method under IAS 28
PTU syllabus topics
- International transfer pricing
- IFRS 10 consolidated financial statements
- IAS 27 separate financial statements
- IFRS 3 business combinations
- IAS 28 investments in associates and joint ventures
- IFRS 10
- Consolidated financial statements: control
- IFRS 3
- Business combinations: acquisition method
- IAS 27
- Separate financial statements
- IAS 28
- Associates and JVs: equity method
- IFRS 11
- Joint arrangements: operations vs ventures
- IFRS 12
- Disclosure of interests in other entities
Topic 1
International transfer pricing
Transfer price: the price charged for goods, services or intangibles between related entities of a multinational group. It shifts profits across countries, so tax authorities require arm's length prices.
- Objectives: performance evaluation, tax minimisation (within law), managing tariffs, repatriation of funds, competitive positioning.
Comparable uncontrolled price (CUP)
Price in comparable independent transactions
Resale price method
Resale price less normal gross margin
Cost plus method
Cost plus normal mark-up
Profit split method
Split combined profit by contributions
Transactional net margin method (TNMM)
Net margin relative to an appropriate base
Other method
Any method reflecting arm's length
- India: Chapter X (Sections 92–92F) — international and specified domestic transactions; Form 3CEB accountant's report; Advance Pricing Agreements (APA) and safe harbour rules; BEPS (OECD) and country-by-country reporting (Master file, CbCR).
Example
An Indian subsidiary sells software services to its US parent at cost + 5%, while comparable firms earn 15%. Tax authorities may adjust the price to cost + 15%, raising Indian taxable income.
Topic 2
IFRS 10 — consolidated financial statements
- Control exists when the investor has (1) power over the investee, (2) exposure or rights to variable returns, and (3) the ability to use power to affect returns.
- Consolidation procedure: combine like items line by line; eliminate the parent's investment and the parent's share of equity; recognise non-controlling interest (NCI); eliminate intra-group balances, transactions and unrealised profits; uniform accounting policies and reporting dates.
- Exemption: investment entities measure subsidiaries at fair value.
Topic 3
IAS 27 — separate financial statements
- Statements of the parent as a stand-alone entity; investments in subsidiaries, associates and joint ventures at cost, under IFRS 9 (fair value), or using the equity method.
Topic 4
IFRS 3 — business combinations
- 1Identify the acquirer
- 2Determine the acquisition date
- 3Recognise and measure identifiable assets acquired and liabilities assumed at fair value
- 4Measure NCI
Fair value (full goodwill) or proportionate share of net assets
- 5Recognise goodwill or gain on bargain purchase
Goodwill
Consideration transferred + NCI + Fair value of previously held interest − Fair value of identifiable net assets
Bargain purchase
Negative goodwill recognised as a gain in profit or loss (after reassessment)
Example
Parent pays $800 for 80% of a subsidiary with identifiable net assets of $900; NCI at proportionate share = $180. Goodwill = 800 + 180 − 900 = $80. Goodwill is not amortised but tested for impairment annually (IAS 36).
- Acquisition costs are expensed; contingent consideration at fair value.
Topic 5
IAS 28 — investments in associates and joint ventures
- Associate: an entity over which the investor has significant influence (power to participate in policy decisions, presumed at 20%–50% voting power).
- Equity method: initially at cost; carrying amount increased or decreased by the investor's share of profit or loss and other comprehensive income; dividends received reduce the carrying amount.
Example
Investor buys 30% of an associate for $300; the associate earns $100 and pays dividends of $40. Carrying amount = 300 + 30 − 12 = $318; share of profit $30 recognised in P&L.
Subsidiary
Control (IFRS 10)
Full consolidation with NCI
Associate
Significant influence (IAS 28)
Equity method
Joint venture
Joint control; rights to net assets (IFRS 11)
Equity method
Joint operation
Joint control; rights to assets and obligations for liabilities
Recognise own share of assets, liabilities, revenue and expenses
Key terms
- Transfer price
- Price for transactions between related entities
- Arm's length price
- Price that unrelated parties would agree
- Control
- Power, variable returns and ability to affect returns (IFRS 10)
- Goodwill
- Excess of consideration over fair value of net assets acquired
- Equity method
- Carrying an investment at cost adjusted for share of post-acquisition results
Quick revision
- Transfer pricing: CUP, resale price, cost plus, profit split, TNMM; APA, BEPS.
- IFRS 10: control test; consolidation with NCI and eliminations.
- IAS 27: separate statements — cost, IFRS 9 or equity method.
- IFRS 3: acquisition method; goodwill not amortised.
- IAS 28: significant influence (20–50%); equity method.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is an arm's length price?
- Q2.Name five transfer pricing methods.
- Q3.Define control under IFRS 10.
- Q4.How is goodwill calculated under IFRS 3?
- Q5.What is significant influence?
- Q6.What is the equity method?
Long-answer questions
- Q1.Explain international transfer pricing and arm's length methods.
- Q2.Explain the consolidation procedure under IFRS 10.
- Q3.Explain the acquisition method under IFRS 3 with an illustration.
- Q4.Explain accounting for associates and joint ventures under IAS 28.
Stuck on this unit?
Message SBS on WhatsApp for help with International Accounting, or to ask about studying M.Com at Synetic.