A bitstream includes coded pictures, and split-flags for generating a transform tree. The bit stream is a partitioning of coding units (CUs) into Prediction Units (PUs). The transform tree is generated according to the split-flags. Nodes in the transform tree represent transform units (TU) associated with the CUs. The generation splits each TU only if the corresponding split-flag is set. For each PU that includes multiple TUs, the multiple TUs are merged into a larger TU, and the transform tree is modified according to the splitting and merging. Then, data contained in each PU can be decoded using the TUs associated with the PU according to the transform tree.