ACCT6010 · Financial Reporting For Business Groups
Intragroup Transactions
A group cannot trade with itself, so on consolidation every internal sale, profit, dividend, loan and fee must be eliminated in full — 100%, regardless of any NCI — so the group reports only transactions with outsiders. The chapter is governed by three golden rules: eliminate the full transaction where no profit remains in the group; eliminate unrealised profit (the mark-up still sitting in assets the group still holds) and reverse its tax effect; and recognise the profit only when it is realised outside the group. The hardest cases are unrealised profit in inventory (closing-inventory and the opening-inventory year, where the prior-period effect goes to Opening Retained Earnings) and in property, plant and equipment (the transfer gain plus the depreciation adjustment in every subsequent year). Dividends, intragroup loans and interest, and management fees are simpler full-elimination entries. This is high-frequency exam territory because every consolidation has internal trading.
What this chapter covers
- 011 The three golden rules of elimination
- 02Intragroup inventory — the closing-inventory year
- 03Inventory — the opening-inventory year and the ORE effect
- 04Intragroup transfer of non-current assets (PPE)
- 05PPE transfers — the depreciation adjustment in subsequent years
- 06Dividends, loans, interest and management fees
Worked example: unrealised profit in closing inventory
- +1Eliminate the internal sale: Dr Sales 200, Cr Cost of sales 200 — removing the full intragroup turnover so group revenue shows only outside sales.
- +1Find the unrealised profit: total mark-up = 200 − 150 = 50; the unrealised portion sits in the 40% still held: 50 × 40% = 20.
- +1Eliminate the unrealised profit from closing inventory: Dr Cost of sales 20, Cr Inventory 20 — writing the inventory back to its original cost to the group.
- +1Reverse the tax effect: the elimination reduces group profit by 20, so Dr Deferred tax asset 6, Cr Income tax expense 6 (20 × 30%).
- +1State the realisation: the 60% sold to outsiders is realised profit and stays; the $20 is recognised only when the subsidiary sells the rest externally next year (via Opening Retained Earnings).
Key terms
- Unrealised profit
- Profit on an intragroup transaction that is still locked inside an asset the group continues to hold (inventory not yet sold to outsiders, a transferred asset still in use). It must be eliminated on consolidation, with its tax effect reversed, until the asset leaves the group.
- The three golden rules
- (1) Eliminate the full transaction where no profit remains in the group; (2) eliminate unrealised profit and reverse its tax effect; (3) recognise profit only when realised outside the group.
- Opening-inventory year
- The year after an intragroup inventory sale: the goods held at last year's close are now sold to outsiders, so the previously deferred profit is realised — recognised via Opening Retained Earnings because the deferral hit a prior period.
- Intragroup PPE transfer
- A sale of a non-current asset within the group. The transfer gain is eliminated, and because the buyer depreciates the inflated cost, a depreciation adjustment must be posted in every subsequent year to unwind the gain over the asset's remaining life.
- Intragroup dividend
- A dividend paid by a subsidiary to the parent, eliminated in full on consolidation (it is internal), so group profit and equity are not double-counted.
Intragroup Transactions FAQ
Why are intragroup transactions eliminated in full, even with an NCI?
Because the group is one economic entity that cannot trade with itself — the consolidated statements must show only transactions with outsiders. Elimination is 100% of the transaction regardless of ownership; the NCI's share of any unrealised profit is dealt with separately in the NCI allocation, not by part-eliminating the transaction.
How do I find the unrealised profit in intragroup inventory?
Take the total mark-up on the internal sale (sale price minus cost to the selling group company) and apply the fraction of those goods still held inside the group at year end. Only that portion is unrealised and deferred; the rest, already sold to outsiders, is realised and stays. Then reverse the tax on the deferred amount.
What happens to last year's deferred inventory profit this year?
It is realised. In the opening-inventory year the goods held at last year's close are sold to outsiders, so the previously deferred profit becomes group profit — but because the deferral reduced a prior period's profit, the reversal is routed through Opening Retained Earnings, not simply added to current profit.
Why does an intragroup PPE transfer need an adjustment in later years?
Because the buyer depreciates the asset on the inflated transfer price, over-depreciating from the group's point of view. So after eliminating the transfer gain, you post a depreciation adjustment every subsequent year that gradually realises the gain over the asset's remaining life — with prior-year portions redirected to Opening Retained Earnings.
Exam move
Anchor every question on the three golden rules and ask first: does the group still hold the asset? If yes, profit is unrealised and is eliminated with its tax reversed; if it has gone to outsiders, the profit is realised and stays. Drill the inventory pair — closing-inventory year, then the opening-inventory year where last year's deferral unwinds through Opening Retained Earnings — and the PPE pair, where the transfer gain is eliminated and then a depreciation adjustment is posted every later year. Treat dividends, loans, interest and fees as quick full-elimination entries, and never forget the tax effect on any deferred profit.
