ACX2100 Chap.12 Consolidation: Eliminating Intragroup Transactions
Consolidation: Eliminating Intragroup Transactions
Consolidated statements include only transactions crossing the group boundary. Internal revenue, expense, receivables, payables, loans and dividends are eliminated in full. An internal inventory sale is removed regardless of external sale status; profit still embedded in closing inventory is deferred until external sale and creates a DTA because group carrying amount falls below the buyer’s tax base.
Prior-period inventory profit is rebuilt through opening retained earnings and released through current cost of goods sold when realised. For an internal plant sale, reverse the gain and restore the asset to group carrying amount, recognise DTA, and correct the buyer’s excess depreciation. Internal profit then becomes group profit gradually through use.
At later reporting dates, prior realised after-tax amounts belong in opening retained earnings while current depreciation correction belongs in current profit. The taught inventory cases use a $1,000 transfer on $800 cost, and the plant sequence uses $1,200 on $800 over ten years; those verified directions are retained. New practice uses other values.
Upstream and downstream transactions use the same basic elimination amount, but seller identity can affect attribution to non-controlling interests.
What this chapter covers
- 01
One economic entity and the external boundary
- 02
Full elimination of internal sales
- 03
Unrealised profit in closing inventory
- 04
All unsold, all sold and partly sold cases
- 05
DTA on reduced group inventory
- 06
Opening inventory and prior-period retained earnings
- 07
Non-current asset transfer and internal gain
- 08
Excess depreciation and annual DTA reversal
- 09
Second-year plant entries
- 10
Services and outstanding balances
- 11
Dividends, loans and interest
- 12
Upstream and downstream attribution
AskSia-authored practice — eliminate current inventory profit and related tax
- ProfitInternal profit on the full transfer is $900 − $600 = $300.
- UnrealisedOne-third remains, so unrealised profit is $300 × one-third = $100.
- EliminateEliminate internal sales $900. Credit COGS $800 and credit inventory $100, which removes the full internal relationship and closing profit.
- TaxGroup inventory CA is $100 below tax base, creating DTD $100 and DTA $30 at 30%.
- LaterWhen the remaining inventory sells externally, release the $100 group profit and reverse the $30 DTA.
Key terms
- Intragroup transaction
- Transaction between entities inside the consolidated group, eliminated because the group cannot transact with itself.
- Unrealised profit
- Internal profit still embedded in an asset held within the group at reporting date.
- Opening inventory adjustment
- Prior-period deferred profit routed through opening retained earnings and released through current COGS on external sale.
- Excess depreciation
- Difference between buyer depreciation on internal transfer price and group depreciation on original group carrying amount.
- Upstream/downstream
- Associate or subsidiary transaction direction based on whether the investee/subsidiary or investor/parent is the seller.
Consolidation: Eliminating Intragroup Transactions FAQ
Is an internal sale eliminated if the goods were sold externally?
Yes, remove internal sales and the matching internal purchase/COGS in full. If all goods were externally sold, no closing inventory profit or DTA remains.
Why does closing inventory create a DTA?
Eliminating internal profit lowers group asset CA below the buyer's tax base, creating a deductible temporary difference.
How does plant profit become realised?
Gradually through the depreciation correction while the group uses the asset, or on sale outside the group.
What changes in year two?
Prior-year effects move through opening retained earnings. Only the current year's excess depreciation and tax reversal affect current result.
Exam move
Draw the group boundary and a realisation timeline. Practise inventory in three states: all unsold, all sold externally and partially unsold. For plant, write internal gain, DTA, buyer depreciation, group depreciation, annual correction and DTA reversal, then roll the schedule into year two with a prior/current label. Use the taught $1,000/$800 inventory and $1,200/$800 plant sequences as direction benchmarks.
Add service, dividend and loan pairs so both income/expense and receivable/payable eliminations become automatic. Week 11 prescribed reading is Chapter 29. Make every solution answer two questions before any debit or credit: has the profit been realised outside the group, and did the internal event occur this period or earlier?
Shade unrealised inventory and use a separate tax column, so a partial-sale question becomes a proportion problem rather than a new rule. For plant, compare depreciation in the buyer’s records with depreciation on the group carrying amount; the difference determines the current-period correction. Then move prior-period effects to opening retained earnings without moving the current correction.
End with a boundary proof: internal revenue and expense pairs disappear, reciprocal balances disappear, and only external profit, assets and liabilities remain. Rework one scenario from the next reporting date to practise the roll-forward.
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