ACC2100 · Financial Accounting
Consolidation: Intragroup Transactions (AASB 10)
Consolidation: Intragroup Transactions (Week 11, AASB 10) eliminates dealings within the group, because consolidated profit can only come from transactions with parties outside the group. You eliminate intragroup sales and unrealised profit in inventory, gains on intragroup asset sales (realised through depreciation), services, dividends and borrowings — each with the AASB 112 tax effect on the eliminated unrealised profit.
This is a Part-2 written-answer stake worth 20 marks (shared with Week 10). Expect the inventory unrealised-profit elimination and the intragroup asset sale with depreciation realisation, both with tax.
What this chapter covers
- 01Consolidated profit arises only from external transactions; eliminate intragroup items in full
- 02Closing inventory with unrealised profit: Dr Sales / Cr COGS / Cr Inventory; tax Dr DTA / Cr ITE on the unrealised profit
- 03If all the inventory is sold externally → reverse Sales & COGS in full, no inventory or tax adjustment
- 04Opening inventory (prior-period unrealised profit): Dr Retained earnings / Cr COGS; tax Dr ITE / Cr Retained earnings
- 05Intragroup non-current asset sold above CA: remove the unrealised gain (Dr Gain / Cr Asset); tax Dr DTA / Cr ITE
- 06Realisation through depreciation: buyer over-depreciates → Dr Accum depn / Cr Depreciation expense, with reversing tax
- 07Intragroup services (Dr Service revenue / Cr Service expense) and dividends (Dr Dividend revenue / Cr Dividend paid)
- 08Intragroup borrowings: Dr Loan payable / Cr Loan receivable; Dr Interest revenue / Cr Interest expense
Intragroup inventory: unrealised profit in closing inventory
- 2 marksFind the unrealised profit — the profit on the portion still on hand: 18,000 × 40% = $7,200. (The 60% sold externally is realised and stays.)
- 1 markDetermine the COGS to credit: total intragroup sales − unrealised profit on unsold = 90,000 − 7,200 = $82,800.
- 2 marksEliminate the intragroup sale and the unrealised profit in inventory: Dr Sales 90,000 / Cr COGS 82,800 / Cr Inventory 7,200.
- 1 markRecognise the tax effect (the inventory write-down is a deductible temporary difference): Dr Deferred tax asset 2,160 / Cr Income tax expense 2,160 (7,200 × 30%).
Key terms
- Unrealised profit
- Profit recorded by one group member on a sale to another that has not yet been confirmed by an onward sale outside the group. It is eliminated on consolidation (only external transactions generate group profit) and is realised when the item is eventually sold externally or consumed.
- Intragroup transaction
- Any dealing between members of the same group — sales, asset transfers, services, dividends, loans and interest. All such items (and their effects) are eliminated in full on consolidation under AASB 10 (para B86(c)).
- Realisation through depreciation
- For an intragroup non-current asset sold above carrying amount, the unrealised gain is removed and then progressively realised as the buyer over-depreciates the inflated cost: each period Dr Accumulated depreciation / Cr Depreciation expense for the excess, with the reversing tax effect.
- Tax effect of elimination
- Because eliminating unrealised profit changes the group's profit relative to what was taxed, AASB 112 is applied: eliminating unrealised profit in inventory creates a deferred tax asset (Dr DTA / Cr ITE); reversing entries reverse the tax.
- Prior-period (opening inventory) adjustment
- Unrealised profit carried in opening inventory from last year is transferred from prior-year profit to the current year: Dr Retained earnings / Cr COGS, with the tax effect routed Dr ITE / Cr Retained earnings.
Consolidation: Intragroup Transactions (AASB 10) FAQ
Why do we eliminate intragroup transactions at all?
Because the consolidated financial statements present the group as a single economic entity, and a single entity cannot make a profit by selling to itself. Only transactions with parties outside the group create real, consolidated profit. So intragroup sales, asset transfers, services, dividends and loans — and any unrealised profit still locked inside the group — are eliminated in full.
How much profit do I eliminate on intragroup inventory?
Only the unrealised portion — the profit on inventory still held within the group at year-end. If a parent makes $18,000 profit and 40% of the goods remain on hand, you eliminate 18,000 × 40% = $7,200. The rest has been on-sold externally and is genuinely realised. If everything is sold externally, you still reverse the intragroup Sales and COGS, but there is no inventory write-down and no tax adjustment.
How is the gain on an intragroup sale of plant realised?
First remove the unrealised gain (Dr Gain on sale / Cr Asset) with its tax effect (Dr DTA / Cr ITE). Then realise it gradually through depreciation: the buyer depreciates the inflated cost, so each year you reverse the excess depreciation (Dr Accumulated depreciation / Cr Depreciation expense) with the reversing tax. For non-depreciable assets like land, the gain is only realised when the asset is eventually sold outside the group.
Do intragroup dividends and loans get eliminated too?
Yes, in full. Intragroup dividends are eliminated (Dr Dividend revenue / Cr Dividend paid), and any declared-but-unpaid dividend also eliminates the related receivable and payable. Intragroup borrowings eliminate the loan (Dr Loan payable / Cr Loan receivable) and the interest (Dr Interest revenue / Cr Interest expense). None of these are transactions with outside parties, so none can appear in the consolidated statements.
Exam move
Build a quick decision tree for each intragroup item: inventory (eliminate sales in full, eliminate only the unrealised profit on the unsold portion, add the DTA), non-current asset (remove the gain, then realise through depreciation each year, with reversing tax), services/dividends/borrowings (straight reciprocal eliminations). The two heavy hitters are inventory and the plant sale, so drill both until the tax effect is automatic — every eliminated unrealised profit gets a 30% deferred-tax entry. Be precise about which figure is which: full intragroup SALES is eliminated, but only the UNREALISED profit hits inventory, and COGS absorbs the difference. Keep the opening-inventory (prior-period) variant in mind: it routes through retained earnings instead of COGS. Lay answers out as named journals with the tax line directly beneath each elimination, and this 20-mark stake (shared with Week 10's acquisition entries) becomes very predictable.
