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Preamble
Intra-group adjustments
Lecture 7
The need to eliminate intra-group
transactions on consolidation
The purpose of consolidated accounts is to show
the financial position and the financial
performance of the group as a whole, as if it is a
single operating unit.
If intra-group transactions are included in the
consolidated financial statements, the
statements will show too many assets, liabilities,
income and expenses for the group as a single
operating unit.
Intra-group sales
If entities within the same group sell goods or
services to each other, these intragroup
transactions will be included in the revenue of
the entity making the sale and as a cost of sale
of the entity making the purchase.
In many groups, business and financial transactions
take place between entities within the group. These
‘intra-group’ transactions might be:
• the sale of goods or services
• transfers of non-current assets
• the payment of dividends
• loans by one entity in the group to another, and
the payment of interest on intragroup loans.
The need to eliminate intra-group
transactions on consolidation
IFRS 10 therefore requires that:
• Intra-group balances and transactions,
including income, expenses and dividends,
must be eliminated in full.
• Profits or losses resulting from intra-group
transactions that are recognised in inventory
or non-current assets must be eliminated in
full.
Intra-group sales
Provided that the items sold and bought
internally have been used to make a sale outside
the group, so that there are no inventories of
intra-group sales items, the adjustment is made
in consolidated profit or loss by deducting the
revenue from intra-group sales from the total
revenue for the group, and deducting the same
amount from the cost of sales.
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Intra-group balances
When entities within a group sell goods to other
entities in the same group, will include other group
entities within their trade receivables (for intra-
group sales) and trade payables (for intra-group
purchases).
The trade receivables of the selling group entity
should equal the trade payables of the buying
group entity. These ‘intra-group balances’ or ‘inter-
entity balances’ must be eliminated on
consolidation and excluded from the consolidated
statement of financial position.
Intra-group balances: Adjusting for
items in transit
The adjustment should be made in the accounts
of the parent, regardless of the direction of the
transfer.
(How about items in transit between
subsidiaries of the same group?)
Having made the adjustment for the item in
transit, the normal rules can then be applied to
prepare the consolidated financial statements.
Unrealised profit in inventory
When there is unrealised profit in closing
inventory within a group, and the inventory has
been sold or purchased by a partly-owned
subsidiary, the entire unrealised profit should
be eliminated from the inventory value.
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Intra-group balances: items in transit
At the year-end, there might be a difference in the
intra-group balances due to goods in transit or cash
in transit.
The entity sending the cash or goods will have
recorded the transaction in its ledger accounts
while the entity receiving the cash or goods has not
yet received anything, and so has not yet recorded
the transaction in its accounts.
Differences in the intra-group balances caused by
items in transit must be removed for the purpose of
consolidation.
Unrealised profit in inventory
When intra-group sales are still held as
inventory, the entity that made the sale has
recorded a profit on the sale, but this profit is
included within the inventory valuation of the
entity that made the purchase, because
inventory is valued at the purchase cost to the
buying entity.
Unrealised profit in inventory
Unrealised profit is eliminated from the
• consolidated statement of financial position by
reducing the consolidated retained earnings by
the amount of the unrealised profit, and reducing
the valuation of the inventory by the amount of
the unrealised profit.
• In the consolidated statement of comprehensive
income/income statement by reducing
consolidated revenue by the amount of the intra-
group sales and reduce the consolidated cost of
goods sold by the intra group-sales (R) minus the
amount of unrealised profit in the closing
inventory
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Unrealised profit in inventory Intra-group loans

If the goods have been sold by the parent (P) to the
subsidiary (S) then the profit has been made in P’s
books and the group consolidated retained profits
are charged with the amount of the unrealised
profit in the same way as when S is a whollyowned
subsidiary.
However if S is not a wholly-owned subsidiary, i.e.
there is a non-controlling interest, and S has sold
the goods to P then normal practice is to charge the
noncontrolling interest with its share of the
unrealised profit.
If one group entity makes a loan to another
group entity, the asset of the lender is matched
by the liability of the borrower, and the asset
and liability should both be eliminated on
consolidation.
Any non-controlling interests in the subsidiary
will be calculated by taking the loan into account
as a liability when calculating the net assets of
the subsidiary.

Intra-group interest Further Intra-group adjustments

When one group entity makes a loan to another Library Task
group entity, there may be accrued interest payable
in the statement of financial position of the • Transfers of non-current assets
borrower at the yearend. • Intra-group dividends
This should be matched by interest receivable by
the lender. The current liability (interest payable)
and the current asset (interest receivable) should
therefore be self-cancelling on consolidation, and
both the asset and the liability should be excluded
from the consolidated statement of financial
position.

The End