Intercompany eliminations

The group is one reporting entity, so it can't trade with itself. IFRS 10.B86(c) requires intragroup assets and liabilities, equity, income, expenses and cash flows to be eliminated in full — and profits or losses on intragroup transactions that are still in assets (inventory, property, plant and equipment) to be eliminated in full too. An intragroup loss may indicate an impairment that needs recognising. Eliminating unrealised profit creates a temporary difference, so IAS 12 deferred tax applies (ignored in the exercises here).

Balances. Intragroup receivables and payables cancel out — but first reconcile them. Cash in transit (sent by one company, not yet received by the other) is recorded as cash; goods in transit as inventory. Then eliminate the agreed balance.

Intragroup sales. Eliminate the seller's revenue and the buyer's cost of sales in full (the group's revenue is only sales to outsiders). If the buyer still holds some of the goods, they're carried at the transfer price, which includes the seller's profit. That unrealised profit (URP) is removed from inventory and from group profit: - Mark-up on cost of x%: URP = inventory × x ÷ (100 + x). - Margin on sales of y%: URP = inventory × y%.

Downstream vs upstream. When the parent sells to the subsidiary (downstream), the profit is in the parent's results, so the whole URP adjustment falls on the parent's shareholders. When the subsidiary sells to the parent (upstream), the profit is in the subsidiary's results: it's still eliminated in full, but the adjustment reduces the subsidiary's profit before it is split, so the NCI bears its share.

Dividends from a subsidiary: the parent's dividend income is eliminated against the subsidiary's dividend; the NCI's share simply reduces NCI. Intragroup loans and interest cancel. Transfers of property, plant and equipment at a profit: eliminate the gain and then the extra depreciation the buyer charges on it each year, so the asset is carried at its cost to the group.