ACC2001 FINANCIAL ACCOUNTING

Trimester 1 AY2020/21

LECTURE 10: INTERCOMPANY TRANSACTIONS

1
Elimination of Intragroup Transactions and Balances

• Operational and financial interdependencies within the group entities

– Lead to intragroup transactions and balances

• Intragroup transactions include for example:

– Buying or selling of inventory
– Transferring of long-lived assets
– Rendering or procuring of services
– Providing financing among the companies within the group

2
Elimination of Intragroup Transactions and Balances

• Transfer of assets within the group:

– Rarely transacted at the carrying amounts of the assets
– Profit margin included in transfer price if transaction done on an arm’s length
basis
– Profit is unrealized until the asset is sold to a 3rd party
– Time lag between purchase and resale of assets results in
overstatement/understatement of group profit/loss and assets
– From the group’s perspective, the unrealized profit has to be eliminated and
the asset restated to the carrying amount based on original cost transacted
with third parties
– For transferred inventory, the carrying amount for the group should be the
lower of original cost as transacted with third parties and net realizable value

3
Elimination of Intragroup Transactions and Balances

• Intragroup transactions give rise to intragroup balances

– E.g. Loan receivable/payable, Dividend receivable/payable, Accounts
payable/receivable to or from group companies

• From an economic perspective, an entity is not able to transact with

itself
– Intragroup assets and liabilities, equity, income, expenses and cash flows
relating to transactions between entities of the group are to be eliminated in
full during consolidation
– Elimination adjustments are made in relation to the original entries passed in
the legal entity’s financial statements

4
Elimination of Intragroup Transactions and Balances

• Consolidation involves a three-step process:

– Preparing consolidation adjusting entries to arrive at consolidated totals that

reflect the effects of transactions of the economic entity with external third
parties

– Preparing consolidation worksheets which combine the legal entities’ financial

statements and show adjustments of consolidation entries

– Analyzing final consolidated totals to independently substantiate the reported

numbers

5
Key Principles Governing Elimination

• Outstanding balances due to or from companies within a group are

eliminated
• Transactions in the income statement between the group companies
are eliminated
• Unrealized profit or loss resulting from intragroup transactions that
are included in the asset are eliminated in full (both parent’s & NCI’s
share)
• Tax effects on unrealized profit or loss included in the asset should
be adjusted according to SFRS(I) 1-12 Income Taxes

6
Elimination of Intragroup Balances

Examples:

Dr Intercompany payable
Cr Intercompany receivable

Dr Dividend payable to parent

Cr Dividend receivable from subsidiary

Dr Loan payable to parent

Cr Loan receivable from subsidiary

7
Intragroup Balances (example)

Parent Co Subsidiary Co
Fixed assets 2,000,000 1,000,000
Inventories 500,000 300,000
Receivables 400,000 100,000
Due from S Co 60,000
Total assets 2,960,000 1,400,000

Share capital 800,000 300,000

Retained earnings 1,760,000 540,000
Payables 400,000 500,000
Due to P Co 60,000
Total liabilities and 2,960,000 1,400,000
shareholder equity

Dr Due to P Co $60,000
Cr Due from S Co $60,000
8
Intragroup Dividend

Under the one-tier corporate tax system, the paying company will pay
dividends net of tax and the receiving entity will report the dividend income at
net (which is not taxable).

Example:
Paying entity
Dr Dividend declared / retained profit X
Cr Dividend payable X
(Appropriation of dividend)

Dr Dividend payable X
Cr Cash X
(Payment of dividend)
9
Intragroup Dividend

Example:
Receiving entity
Dr Cash X
Cr Dividend income X
(Receipt of dividend income)

Consolidation Elimination:
Dr Dividend income (R) X
Cr Dividend declared (P) X

Dr Dividend payable X
Cr Dividend receivable X
10
Intragroup Dividend (example)

Parent Co Subsidiary Co
Operating Profit 565,000 225,000
80%
Dividend income from S 28,000
owned
Ltd
by Parent
Profit before tax 593,000 225,000
Tax expense (113,000) (45,000)
Profit after tax 480,000 180,000
Dividends declared (100,000) (35,000)
Profit retained 380,000 145,000
Beg retained earnings 1,620,000 155,000
Ending retained earnings 2,000,000 300,000

Dr NCI $7,000 (20% x $35,000)

Dr Dividend income (P/L) $28,000
Cr Dividends Declared $35,000

11
Elimination of Realized Intragroup Transactions

• “Offsetting” effect on the group net profit from realized transactions

– Profit recorded by the selling company offset the expense recorded by buying
company
– Elimination is still required to avoid overstatement of individual line items

Examples:
1. Transactions relating to interest:
– Usually no time lag in the recognizing of interest by borrower and lender i.e.
interest income exactly offsets the interest expense
– Elimination entry:

Dr Interest Income (lender)

Cr Interest Expense (borrower)

12
Elimination of Realized Intragroup Transactions

2. Transfers of inventories that are resold to 3rd party in the same period
– Profit recorded by selling company offset the higher cost of sale recorded by
buying company
– Consolidated financial statements should only show the sale to third parties
and the original cost of purchasing the inventory from third parties
– Elimination entry:

Dr Sales
Cr Cost of Sales

13
Intragroup Transfers of Inventory

• Unrealized profit and loss in asset (arising from intragroup transaction)

should be eliminated in full unless the loss is impairment loss

• If the transferred asset is inventory:

– It should be carried at lower of cost and net realizable value
– Cost is the exchange price when the goods were originally purchased from a
third party
– Adjustments are made to eliminate the profit element in the carrying amount of
the inventory arising from intragroup transaction
– Recognize profit only when the inventory is sold to 3rd party
✓ Cost of sales in the consolidated financial statements should be the original cost as
transacted with unrelated third parties and not the transfer price invoiced by one group
company to another

14
Intragroup Transfers of Inventory

• Unrealized profit in inventory

Transfer
price (TP) Unrealized profit
Original
cost (OC)* Inventory amount in
Inventory amount on buying company’s
consolidation books

• TP – OC (unrealized profit arising from intragroup transaction) in

remaining inventory should be eliminated

*Assuming that the carrying amount prior to the transfer is the original cost
15
 Intragroup Transfers of Inventory
• Some of the stock sold to intragroup entities may either be sold to an outside party
or remain as stock within the group at the end of the accounting period.
• Intragroup profit on the goods held by the buying entity is unrealized until it is sold
to third parties.
Example:
F Ltd acquired 100% of G Ltd in 20X5. Since 1 Jan 20X7, G Ltd was asked to sell goods to
F Ltd at cost plus 25%. The total intragroup sales for 20X7 was $400,000. F Ltd’s stock at
31 Dec 20X7 includes $50,000 of the goods purchased from G Ltd. For 20X8, the total
intragroup sales was $500,000 and includes $35,000 of the goods purchased from G Ltd.
The FIFO inventory method is used.
20X7
CJE (a) CJE (b)
Dr Sales 400,000 Dr Cost of sales (G) 10,000
(change in stock)
Cr Cost of sales (purchases) 400,000 Cr Closing stock (CSFP) 10,000
[$50,000-($50,000/1.25)]
(to eliminate intragroup sales) (to eliminate unrealized intragroup profit in
closing stock) 16
 Intragroup Transfers of Inventory
F Ltd acquired 100% of G Ltd in 20X5. Since 1 Jan 20X7, G Ltd was asked to sell goods to
F Ltd at cost plus 25%. The total intragroup sales for 20X7 was $400,000. F Ltd’s stock at
31 Dec 20X7 includes $50,000 of the goods purchased from G Ltd. For 20X8, the total
intragroup sales was $500,000 and includes $35,000 of the goods purchased from G Ltd.
The FIFO inventory method is used.
20X7 – Consolidation worksheet (Before CJE are carried out)
PL Parent F Child G CJE DR CJE CR Consolidated
Sales 350,000 400,000 750,000
COGS 350,000 320,000 670,000
Profit 0 80,000 80,000

SFP Parent F Child G CJE DR CJE CR Consolidated

Inventory 50,000 50,000

$400,000 $350,000
Child G Parent F 3rd Party
Cost: $320,000 Cost: $350,000
17
Inventory: $50,000
 Intragroup Transfers of Inventory
F Ltd acquired 100% of G Ltd in 20X5. Since 1 Jan 20X7, G Ltd was asked to sell goods to
F Ltd at cost plus 25%. The total intragroup sales for 20X7 was $400,000. F Ltd’s stock at
31 Dec 20X7 includes $50,000 of the goods purchased from G Ltd. For 20X8, the total
intragroup sales was $500,000 and includes $35,000 of the goods purchased from G Ltd.
The FIFO inventory method is used.
20X7 – Consolidation worksheet (Extract) $
PL Parent F Child G CJE DR CJE CR Consolidated
Sales 350,000 400,000 400,000 (CJE a) 350,000
COGS 350,000 320,000 10,000 (CJE b) 400,000 (CJE a) 280,000
Profit 0 80,000 70,000

SFP Parent F Child G CJE DR CJE CR Consolidated

Inventory 50,000 10,000 (CJE b) 40,000 DR

$400,000 $350,000
Child G Parent F 3rd Party
Cost: $320,000 Real cost: $280,000

18
Inventory: $50,000 (real cost: $40,000)
Intragroup Transfers of Inventory
20X7
CJE (a) CJE (b)
Dr Sales 400,000 Dr Cost of sales (G) 10,000
(change in stock)
Cr Cost of sales (purchases) 400,000 Cr Closing stock (CSFP) 10,000
[$50,000-($50,000/1.25)]
(to eliminate intragroup sales) (to eliminate unrealized intragroup profit in
closing stock)

Alternative CJE:

CJE
Dr Sales 400,000 → Transfer price
Cr Cost of sales 390,000 → Balancing
Cr Closing stock (CSFP) 10,000 → Unrealized profit
(eliminate unrealized intragroup profit in closing stock)
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 Intragroup Transfers of Inventory
Second year:
F Ltd acquired 100% of G Ltd in 20X5. Since 1 Jan 20X7, G Ltd was asked to sell goods to F Ltd at
cost plus 25%. The total intragroup sales for 20X7 was $400,000. F Ltd’s stock at 31 Dec 20X7
includes $50,000 of the goods purchased from G Ltd. For 20X8, the total intragroup sales was
$500,000 and includes $35,000 of the goods purchased from G Ltd. The FIFO inventory method is
used.
20X8
CJE (a) CJE (b)
Dr Sales 500,000 Dr Cost of sales (change in stock) (G) 7,000
Cr Cost of sales (purchases) 500,000 Cr Closing stock (CSFP) 7,000
[$35,000-($35,000/1.25)]
(eliminate intragroup sales) (eliminate unrealized intragroup profit in closing stock)

CJE (c)
Dr Beginning retained profit (G) 10,000
Cr Cost of sales (change in stock) (G) 10,000
(realization of intragroup profit in opening stock)

20
Intragroup Transfers of Inventory
F Ltd acquired 100% of G Ltd in 20X5. Since 1 Jan 20X7, G Ltd was asked to sell goods to F Ltd at
cost plus 25%. The total intragroup sales for 20X7 was $400,000. F Ltd’s stock at 31 Dec 20X7
includes $50,000 of the goods purchased from G Ltd. For 20X8, the total intragroup sales was
$500,000 and includes $35,000 of the goods purchased from G Ltd. The FIFO inventory method is
used.
20X8 Consolidation worksheet (Extract) $
PL Parent F Child G CJE DR CJE CR Consolidated
Sales $515,000 500,000 500,000 (CJE a) $515,000

COGS (465,000) (400,000) 7,000 (CJE b) 500,000 (CJE a) (372,000)

COGS (50,000) - 10,000 (CJE c) (40,000)

GP 0 100,000 103,000

$465,000
$500,000 Cost: $372,000
Child G Parent F 3rd Party
Cost: $400,000 $50,000
Cost: $40,000
21
Inventory: $35,000 (cost: $28,000)
 Intragroup Transfers of Inventory

20X8 Consolidation worksheet (Extract) $

PL Parent F Child G CJE DR CJE CR Consolidated
Sales $515,000 500,000 500,000 (CJE a) $515,000

COGS (465,000) (400,000) 7,000 (CJE b) 500,000 (CJE a) (372,000)

COGS (50,000) - 10,000 (CJE c) (40,000)

GP 0 100,000 103,000

$465,000
$500,000 Cost: $372,000
Child G Parent F 3rd Party
Cost: $400,000 $50,000
Cost: $40,000
Inventory: $35,000 (cost: $28,000)

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Intragroup Transfers of Inventory
$465,000
$500,000 Cost: $372,000
Child G Parent F 3rd Party
Cost: $400,000 $50,000
Cost: $40,000
Inventory: $35,000 (cost: $28,000)
1st question: How do you interpret the Group Profit of $103,000?
Analytical check:
$100,000 (Child G) + $10,000 (sale of beginning inventory) – $7,000 (unrealized profit)
= $103,000
Alternatively, you can compute the profit from sale of goods to external parties:
$93,000 ($465,000 - $372,000) + $10,000 ($50,000-$40,000) = $103,000
2nd question: What is the Group’s retained earnings at end of second year?
Answer: $173,000 ($70,000 + $103,000)

3rd question: What is the subsidiary’s retained earnings at end of second year?
Answer: $180,000 ($80,000 + $100,000) 23
 Unrealized Intragroup Profit/Loss
• Where an entity sells goods or assets at a price above or below cost to another
entity in the group, and the goods or assets are still held by the buying entity at the
end of the accounting period, then the following adjustments must be made:
• Eliminate 100% of the unrealized profit or loss from the group’s profits
• Revert the value of the asset back to its original cost to the group.
Examples:
• Dr Profit on sale of land 100,000
• Cr Land 100,000
(To record in the first year of disposal)
• Dr Beginning retained profit 100,000
• Cr Land 100,000
(To record in the second year of disposal)
• Dr Beginning retained profit 100,000
• Cr Profit on sale of Land 100,000
(To record realization of intragroup profit when asset is sold in subsequent year) 24
 Intragroup Sale of Depreciable Assets

• Subsequent depreciation charges may be seen as the sale of a portion of depreciable

asset to third parties.
• Treated as gradual realization of the initial unrealized profit
Example:
J Ltd acquired 100% of K Ltd in 20X2. On 30 Dec 20X5, K sold machinery to J for
$400,000. The machinery was bought by K in Jan 20X1 and was carried in K’s books on
30 Dec 20X5 at cost $600,000 and accumulated depreciation of $300,000.
Depreciation on a straight-line basis over 10 years and a full year depreciation is
charged if the machine has been used for more than 6 months in the year. Remaining
useful life of 5 years in J’s hands after 5 years have elapsed by K.
20X5
Dr Profit on sale of machinery (K) 100,000 ($400,000 - NBV)
Dr Machinery 200,000
Cr Accumulated depreciation 300,000
(Eliminate unrealized intragroup profit as if the machinery was not sold to J)
25
 Intragroup Sale of Depreciable Assets
20X6

Dr Beginning retained profit (K) 100,000 Dr Accumulated depreciation 20,000

Dr Machinery 200,000 Cr Depreciation expense 20,000
Cr Accumulated depreciation 300,000
(Record gradual realization of unrealized profit -
(Eliminate unrealized intragroup profit)
100,000/5 years)

Depreciation charge incurred by J Ltd (purchaser) is now $80,000 ($400,000/5 years).

CJE entry to reduce depreciation charge to original amount of $60,000 ($600,000/10 years)
20X7
Dr Beginning retained profit (K) 100,000 Dr Accumulated depreciation 40,000
Dr Machinery 200,000 Cr Beg retained profit 20,000
Cr Accumulated depreciation 300,000 Cr Depreciation expense 20,000
(Eliminate unrealized intragroup profit)
(Record gradual realization of unrealized profit –
100,000/5 years*2)

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Tax effects on Intragroup Sale of Assets

• Consolidated tax expense must reflect the tax effects of the

consolidated profit before tax
– Tax expense should be aligned with income recognition
• When unrealized profit is eliminated:
– Profit is taxable for the legal entity but not the economic entity
– A deferred tax asset arises (i.e. in the form of a prepaid tax)
– Consolidation adjustment:
In the current period: In the following period:
Dr Deferred tax asset Dr Deferred tax asset
Cr Tax expense Cr Opening RE
– The tax expense is recognized when the asset is sold to 3rd party
Sold in the current period: Sold in the following period:
Dr Tax expense Dr Tax expense
Cr Deferred tax asset Cr Opening RE
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 Tax effects on Intragroup Sale of Assets

Recall the previous example on the sale of land:

Dr Profit on sale of Fixed Assets 100,000
Cr Fixed Asset 100,000

Dr Deferred tax asset (Tax at 20%) 20,000

Cr Tax expense 20,000
(Eliminate unrealized profit and tax impact in the year of intragroup sale)

Dr Beginning retained profit 80,000 (100,000-20,000)

Dr Tax expense 20,000
Cr Profit on sale of Fixed asset 100,000
(To record R/E b/f and, realized profit and tax impact upon sale of fixed
asset to third party in subsequent year) 28
Tax effects on Sale of Inventory

• S is a wholly owned subsidiary of P

• On 1 April 20×1, S sold inventory costing $7,000 to its P for $10,000
• On 5 Jan 20×2, P sold the inventory to external party for $15,000
• Assume tax rate of 20%. Year-end is 31 Dec 20×1.
Q1 What are the consolidation journal entries as at YE 31 Dec 20×1 ?
Dr Sales (S’s I/S) 10,000
Cr Cost of sales (S’s I/S) 7,000
Cr Inventory (P’s SFP) 3,000
This entry is to reduce current year profits and overstatement of
inventory from the unrealized profit of $3,000

Dr Deferred tax asset (Group SFP) 600 (3,000 * 20%)

Cr Tax expense (S’s I/S) 600
This entry is to reduce current year profits and overstatement of
inventory from the unrealized profit of $3,000 29
Tax effects on Sale of Inventory
Q2: What are the consolidation entries as at 31 Dec 20×2?
Dr Opening RE (S’s SFP) 3,000
Cr Cost of Sale (P’s I/S) 3,000
This entry is to reduce previous year profit through opening RE and recognize
profit in the current year when the inventory is sold to a 3rd party

Dr Tax expense (Group’s P/L) 600

Cr Opening RE (S’s SFP) 600
Since the profit is realized in this year, the tax expense should be recognized in
the group’s income statement in the current year

If sale to an external party is only made in 20×3, then 20x2 CJEs:

Dr Opening RE (S’s SFP) 3,000
Cr Inventory (P’s SFP) 3,000
Dr Deferred tax asset (Group’s SFP) 600
Cr Opening RE (S’s SFP) 600
30
Downstream Sale

Unrealized profit
resides in Parent’s Parent
book
Sales were made
from parent to
90 %
subsidiary
owned

Mark-up inventory
remains on Subsidiary
Subsidiary’s SFP

In downstream sale, NCI’s share of profit of the subsidiary is not affected because
the adjustment affects the parent’s profit, not the subsidiary
31
Upstream Sale

Mark-up inventory
remains on Parent’s Parent
SFP

Sales were made

from subsidiary
90 % to parent
owned

Unrealized profit resides

in Subsidiary’s book Subsidiary

In upstream sale, the unrealized profit resides in the subsidiary. Thus, NCI’s share
of the unrealized profit or loss needs to be adjusted from the carrying amount of
the asset (SFRS(I) 10 Para B86(c))
32
Upstream and Downstream Sales - Example

• P invested in 70% of shares of S

• Intercompany transfers of inventory are as follows:
20×3 20×4
Sale of inventory from P to S $60,000
Original cost of inventory $(50,000)
Gross profit $10,000
Percentage unsold to 3rd party at year end 10% 4%
Sale of inventory from S to P $200,000
Original cost of inventory $(170,000)
Gross profit $30,000
Percentage unsold to 3rd party at year end 30% 0%

• Tax rate: 20%

• Net profit after tax of S: $800,000 (31 Dec 20×3)
$900,000 (31 Dec 20×4)
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Upstream and Downstream Sales – Year 1

31 Dec 20×3
CJE 1: Elimination of intercompany sales and adjustment of
unrealized profit from downstream sale
Dr Sales 60,000
Cr Cost of sales 59,000 Residual value

Cr Inventory 1,000 Unrealized profit ×

percentage unsold

Sales (as reported in P’s I/s) $60,000

Sales (as reported in S’s I/s) 54,000 (90% x 60,000;
assume no mark-up)
Combined sales 114,000

External sales (from group’s perspective) $54,000

Amount to be eliminated $60,000
34
Upstream and Downstream Sales – Year 1

31 Dec 20×3
CJE 1: Elimination of intercompany sales and adjustment of
unrealized profit from downstream sale
Dr Sales 60,000
Cr Cost of sales 59,000 Residual value

Cr Inventory 1,000 Unrealized profit ×

percentage unsold

Cost of sales (as reported in P’s I/s) $50,000

Cost of sales (as reported in S’s I/s) 54,000 (90% of $60,000)
Combined cost of sales 104,000

Cost of sales (from group’s perspective) $45,000 (90% of $50,000)

Amount to be eliminated $59,000

35
Upstream and Downstream Sales – Year 1

CJE 1 is a composite of two sub-entries:

CJE 1(a): Elimination of realized sales from downstream sale
Dr Sales (P) 54,000 (90% × $60,000)
Cr Cost of sales (S) 54,000
Eliminates the sales of P against the cost of sales of S for the proportion of
inventory that was resold to third parties during 20×3

CJE 1(b): Reversal of unrealized sales and removal of profits from inventory
Dr Sales (P) 6,000 (10% × $60,000)
Cr Cost of sales (S) 5,000 (10% × $50,000)
Cr Inventory (S) 1,000 (10% × $10,000)
Reverses the sales, cost of sales and profit in inventory for the proportion of
inventory that remained unsold as at 31 Dec 20×3

36
Upstream and Downstream Sales – Year 1

CJE 2: Adjustment for the tax effects on unrealized profit in

inventory from downstream sales
Dr Deferred tax asset 200 Unrealized profit
from unsold
Cr Tax expense 200 inventory × 20%

CJE 3: Elimination of intercompany sales and adjustment of unrealized profit from

upstream sale
Dr Sales 200,000
Cr Cost of sales 191,000
Cr Inventory 9,000 (30% × $30,000)

CJE 4: Adjustment for the tax effects on unrealized profit in inventory from
upstream sales
Dr Deferred tax asset 1,800
Cr Tax expense 1,800 (20% × $9,000)
37
Upstream and Downstream Sales – Year 1

CJE 5: Allocation of current profit after tax to non-controlling interests

Dr Income to NCI 237,840
Cr NCI 237,840

Net profit after tax of S for 20×3* $800,000

Less: unrealized profit from upstream sale (CJE 3) (9,000)
Add: tax expense on unrealized profit (CJE 4) 1,800
Adjusted net profit after tax of S for 20×3 $792,800
NCI’s share of profit after tax for 20×3 (30%) $237,840

*Note: No adjustment is required for the unrealized profit from

downstream sale as profits reside in parent income

38
Upstream and Downstream Sales – Year 2

31 Dec 20×4

CJE 1: Adjustment of unrealized profit from downstream sale in RE as at 1 Jan 20×4

Dr Opening RE 1,000 (10% × $10,000)
Cr Cost of sales 600 (6% × $10,000)
Cr Inventory 400 (4% × $10,000)

CJE 2: Adjustment of tax on unrealized profit from downstream sale in RE as at 1

Jan 20×4
Dr Tax expense 120
Dr Deferred tax asset 80
Cr Opening RE 200

39
Upstream and Downstream Sales – Year 2

CJE 3: Adjustment of unrealized profit from upstream sale in RE as at 1 Jan 20×4

Dr Opening RE 6,300 (70% × 30% × $30,000)
Dr NCI 2,700 (30% × 30% × $30,000)
Cr Cost of sale 9,000 (30% × $30,000)

CJE 4: Adjustment of tax on unrealized profit from upstream sale as at 1 Jan 20×4
Dr Tax expense 1,800
Cr Opening RE 1,260
Cr NCI 540

CJE 5: Allocation of post-acquisition RE as at 1 Jan 20×4

Dr Opening RE 240,000 (30% × $800,000)*
Cr NCI 240,000
*Use unadjusted profit after tax for YE 20×3 to compute NCI’s share of post-acquisition
RE.
Combined effect of CJE 3, CJE 4, CJE 5 results in NCI’s share of adjusted opening 40
RE, which corresponds to CJE 5 passed in 20×3
Upstream and Downstream Sales – Year 2

CJE 6: Allocation of current profit after tax to non-controlling interests

Dr Income to NCI 272,160
Cr NCI 272,160

Net profit after tax of S for 20×4* $900,000

Add: realized profit from upstream sale (CJE 3) 9,000
Less: tax expense on realized profit (CJE 4) (1,800)
Adjusted net profit after tax of S for 20×4 $907,200
NCI’s share of profit after tax for 20×4 (30%) $272,160

41
Summary

• Intragroup balances and transactions are to be eliminated during consolidation

• Profit is unrealized until the asset (e.g. inventory) is sold to a 3rd party. From the
group’s perspective, the unrealized profit has to be eliminated and the asset
restated to the carrying amount based on original cost transacted with third
parties.

• For depreciable assets, subsequent depreciation charges may be seen as the sale
of a portion of depreciable asset to third parties. It is treated as gradual realization
of the initial unrealized profit.

• Key difference between downstream and upstream sale: NCI’s share of the
unrealized profit or loss needs to be adjusted ONLY in upstream sale

• Take note tax effects on elimination of unrealized profit or loss. Removal of

unrealized profit gives rise to DTA and removal of unrealized loss gives rise to DTL.
42