Advanced Accounting · AS 21 Consolidated Financial Statements

AS 21: Unrealised Profits, Mid-year Acquisition and Disposal

Updated 4 October 2026 · Fact-checked

Under AS 21, you eliminate intra-group balances and unrealised profits in full, include a subsidiary's results only from the date control starts until it ends, and treat pre-acquisition profit as capital. Upstream profit is shared with minority interest; downstream profit falls on the parent. On disposal, show profit or loss in consolidated profit and loss.

Understand Unrealised Profits, Mid-year Acquisition and Disposal

A consolidated statement shows the group as one entity. So anything the group did only with itself must disappear. If a subsidiary sells goods to the parent at a profit and the parent still holds them, the group has not earned that profit yet. It is unrealised profit, and you remove it from the profit and from the stock value.

The direction of the sale matters for who bears the cut. In an upstream transaction the subsidiary sells to the parent. The profit sits in the subsidiary's books, so minority interest shares the reduction. In a downstream transaction the parent sells to the subsidiary. The profit sits in the parent's books, so the whole reduction falls on the parent's share. AS 21 requires full elimination in both cases, not just the parent's percentage. Unrealised losses are also eliminated, unless the cost cannot be recovered.

For a mid-year acquisition, the subsidiary's profit for the year is split at the date control starts. Profit up to that date is pre-acquisition (capital) profit and goes into the cost of control. Profit after that date is post-acquisition (revenue) profit and is shared between the parent and minority interest. If no better data is given, split the year's profit on a time basis.

On disposal, the subsidiary is consolidated only up to the date control ends. Profit or loss on disposal is the sale proceeds less the parent's share of the carrying amount of the subsidiary's net assets, plus any unamortised goodwill, at the disposal date. Do not compare the proceeds with 100% of the net assets. The result is shown in consolidated profit and loss. If you still hold some shares, they are accounted for under AS 13, or under AS 23 if the investee becomes an associate.

Some special adjustments also appear. Use uniform accounting policies, or disclose where this is not practicable. Draw statements to the same date. Only when that is impracticable, adjust for significant transactions between the two dates; the difference between the reporting dates should not be more than six months. A subsidiary is excluded from consolidation only if control is intended to be temporary or it works under severe long-term restrictions. Then you account for it under AS 13.

Key rules to remember

Profit margin from markup on cost: Profit as % of selling price = Markup % ÷ (100 + Markup %) × 100; Use this when the profit is given on cost. 25% on cost is 25 ÷ 125 = 20% of selling price.
Unrealised profit in closing stock: Unrealised profit = Intra-group stock still unsold at year end (at transfer price) × Profit % on selling price; Apply the percentage to the transfer price of the unsold stock, not its cost to the buyer's group.
Change in unrealised profit in the year: Charge to current year = Closing unrealised profit − Opening unrealised profit; The opening amount is treated as realised this year if that stock was sold outside the group.
Upstream sharing: Reduce subsidiary's profit by the unrealised profit; Minority share = Minority % × (adjusted subsidiary profit); Minority interest bears its share of the reduction.
Downstream sharing: Reduce parent's profit by the full unrealised profit; Minority interest is not affected.
Unrealised profit in a fixed asset: Unrealised profit = Transfer price − Carrying amount in the seller's books at transfer; Excess depreciation = Depreciation rate × Unrealised profit; Reduce the asset by the unrealised profit net of excess depreciation. Add back the excess depreciation to profit.
Mid-year split of subsidiary profit: Pre-acquisition profit = Profit for the year × Months before acquisition ÷ 12; Time basis, when profit is assumed to accrue evenly. Use the data given in the question if it is more specific.
Cost of control at acquisition: Goodwill (or capital reserve) = Cost of investment − Parent's share of (share capital + reserves + pre-acquisition profit) at acquisition date; A positive result is goodwill. A negative result is capital reserve.
Profit or loss on disposal: Profit or loss = Sale proceeds − Parent's share of the carrying amount of the subsidiary's net assets (plus unamortised goodwill) at the disposal date; Shown in consolidated profit and loss. Results of the subsidiary are included up to the disposal date.

How to solve Unrealised Profits, Mid-year Acquisition and Disposal questions

Use the same order for every question. It stops you from missing a adjustment or double counting a profit.

1Fix the dates. Note the date control starts, the date it ends if there is a disposal, and the balance sheet date. Work out the months of post-acquisition period.
2Split the subsidiary's profit into pre-acquisition and post-acquisition parts. Pre-acquisition goes to cost of control. Post-acquisition is shared with minority.
3Identify each intra-group transaction and mark it as upstream or downstream. Note who sold, who holds the stock or asset, and how much is unsold.
4Compute the unrealised profit. Convert profit on cost to profit on sales if needed. For fixed assets, compute the gain at transfer and the excess depreciation.
5Adjust the right party. Upstream: reduce the subsidiary's profit and let minority share it. Downstream: reduce the parent's profit fully. Reduce stock or the asset in the consolidated balance sheet by the same amount.
6Compute cost of control, minority interest and consolidated reserves in that order. Show each working as a separate note.
7Eliminate mutual balances such as debtors, creditors, bills and unpaid dividends. Check that the balance sheet totals agree.
8For disposal, include results to the disposal date, compute profit or loss on disposal, and account for any retained shares under AS 13 or AS 23. State your assumptions.

Quickest way: Direction first, then three working notes

When to use it: Use this for any mixed question with intra-group stock, a mid-year date, or a disposal, especially when you have limited time for the written part and some MCQs.

For every sale, write U (upstream) or D (downstream) in the margin. This one mark decides who bears the cut.
Convert the profit to a percentage of sales once. Then multiply by unsold stock at transfer price.
For MCQs, check the percentage base first. Options often differ only because of profit on cost versus profit on sales. Also eliminate options that apply only the parent's share to upstream profit.
Build three notes in a fixed order: Note 1 cost of control, Note 2 minority interest, Note 3 consolidated reserves. Write formulas first, then numbers, so you earn step marks even if one figure goes wrong.
For mid-year problems, multiply the year's profit by the fraction first and write both parts side by side.
For disposal, write a one-line formula for profit on disposal, then compute. End with the treatment of any retained investment.
Finish with a quick check: parent's share + minority share should equal total adjusted subsidiary profit.

Common mistakes in Unrealised Profits, Mid-year Acquisition and Disposal

Eliminating only the parent's percentage of unrealised profit in an upstream sale.
Students remember that the parent owns only part of the subsidiary and scale down everything.
Fix: AS 21 requires full elimination. Remove the whole amount from the subsidiary's profit and stock. Minority interest then bears its share through the adjusted profit.
Applying the profit percentage on cost directly to the transfer price.
The question says 25% profit on cost and students use 25% on the selling price.
Fix: Convert first. Profit on sales = 25 ÷ 125 = 20%. Then multiply by the unsold stock at transfer price.
Treating the whole year's subsidiary profit as post-acquisition in a mid-year purchase.
Students use the year-end balance sheet and ignore the date of acquisition.
Fix: Split the year's profit by months. The pre-acquisition share reduces goodwill and does not enter consolidated reserves.
Ignoring the opening unrealised profit in the next year.
Students only look at closing stock.
Fix: Opening unrealised profit is realised if the stock is sold outside the group in the year. Adjust only the change between closing and opening, and carry the opening amount against the opening reserves.
Forgetting to adjust depreciation on an intra-group fixed asset sale.
Students remove the profit from the asset but leave the extra depreciation charged on the inflated value.
Fix: Compute depreciation on the unrealised profit portion and add it back. The net reduction in the asset is the profit less the excess depreciation charged so far.
Writing disposal profit as sale proceeds minus the cost of investment only, or comparing proceeds with 100% of the net assets.
Cost of investment is how profit is shown in the parent's own books, and students forget that only the parent's share of net assets is being sold.
Fix: In consolidated statements, compare proceeds with the parent's share of the carrying amount of the net assets, plus unamortised goodwill, and recognise results up to the disposal date.

Worked examples

Example 1

P Ltd holds 80% of S Ltd, acquired at the start of the year. During the year S Ltd sold goods to P Ltd for ₹3,00,000 at a profit of 25% on cost. One-third of these goods are unsold with P Ltd at year end. P Ltd's own profit for the year is ₹8,00,000 and S Ltd's profit is ₹5,00,000, both before adjustment. (a) Compute the consolidated profit attributable to P Ltd's shareholders and minority interest's share of profit. (b) Repeat if P Ltd had sold the goods to S Ltd instead, on the same terms.

Show the solution

Cost of the goods to S Ltd = 3,00,000 × 100 ÷ 125 = ₹2,40,000. Profit on the sale = ₹60,000.
Unsold stock is one-third, so unrealised profit = 60,000 × 1/3 = ₹20,000. Check with the percentage: profit on sales is 20%, and unsold stock at transfer price is ₹1,00,000, so 20% gives ₹20,000.
(a) The sale is upstream, so reduce S Ltd's profit: 5,00,000 − 20,000 = ₹4,80,000.
P Ltd's share = 80% × 4,80,000 = ₹3,84,000. Minority share = 20% × 4,80,000 = ₹96,000.
Profit attributable to P Ltd = 8,00,000 + 3,84,000 = ₹11,84,000.
Check: 11,84,000 + 96,000 = 12,80,000, which is the combined profit of ₹13,00,000 less ₹20,000.
(b) The sale is downstream, so reduce P Ltd's profit: 8,00,000 − 20,000 = ₹7,80,000.
S Ltd's profit is unchanged, so P Ltd's share = 80% × 5,00,000 = ₹4,00,000 and minority share = 20% × 5,00,000 = ₹1,00,000.
Profit attributable to P Ltd = 7,80,000 + 4,00,000 = ₹11,80,000.

Answer: (a) Upstream: consolidated profit attributable to P Ltd is ₹11,84,000 and minority interest's share is ₹96,000. (b) Downstream: attributable to P Ltd is ₹11,80,000 and minority's share is ₹1,00,000. In both cases stock is reduced by ₹20,000.

Example 2

P Ltd acquired 75% of the shares of S Ltd on 1 July 2026 for ₹12,00,000. The year ends on 31 March 2027. On 1 April 2026, S Ltd had equity share capital of ₹10,00,000 and reserves of ₹2,00,000. S Ltd's profit for the year ended 31 March 2027 was ₹3,60,000, earned evenly through the year. Compute goodwill or capital reserve on consolidation, minority interest at 31 March 2027, and P Ltd's share of post-acquisition profit.

Show the solution

Pre-acquisition period is 1 April to 30 June 2026, which is 3 months. Pre-acquisition profit = 3,60,000 × 3 ÷ 12 = ₹90,000.
Post-acquisition profit = 3,60,000 − 90,000 = ₹2,70,000.
Net assets of S Ltd at the date of acquisition = 10,00,000 + 2,00,000 + 90,000 = ₹12,90,000.
P Ltd's share = 75% × 12,90,000 = ₹9,67,500.
Cost of control: cost 12,00,000 − 9,67,500 = ₹2,32,500. This is a positive amount, so it is goodwill.
Minority interest at acquisition = 25% × 12,90,000 = ₹3,22,500.
Minority share of post-acquisition profit = 25% × 2,70,000 = ₹67,500. Minority interest at 31 March 2027 = 3,22,500 + 67,500 = ₹3,90,000.
P Ltd's share of post-acquisition profit = 75% × 2,70,000 = ₹2,02,500. This is added to P Ltd's own reserves in consolidated reserves.
Check: S Ltd's net assets at year end = 10,00,000 + 2,00,000 + 3,60,000 = ₹15,60,000. 25% of this is ₹3,90,000, which matches the minority interest.

Answer: Goodwill on consolidation is ₹2,32,500. Minority interest at 31 March 2027 is ₹3,90,000. P Ltd's share of post-acquisition profit is ₹2,02,500.

Exam tips

Always state whether the transaction is upstream or downstream in your answer. Examiners award a mark for the correct treatment of the minority share even if the arithmetic slips.
Read the profit margin carefully. Questions often give profit on cost in one place and on sales in another, and MCQ options are built around that confusion.
In a mid-year question, write the pre- and post-acquisition split as a separate working note. Do not mix it into the balance sheet columns.
For disposal questions, write the formula for profit on disposal, state that results are included up to the disposal date, and mention how a retained stake is accounted for. Each is a separate step mark.
Do not skip the mutual balances and uniform accounting policy points in a long problem. Add a short note of assumptions where the question is silent.

Practice questions from AS 21 Consolidated Financial Statements

Unrealised Profits, Mid-year Acquisition and Disposal in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsIntragroup Trading and Unrealised Profit

Unrealised Profits, Mid-year Acquisition and Disposal: frequently asked questions

What is the difference between upstream and downstream transactions in AS 21?

In an upstream transaction the subsidiary sells to the parent. In a downstream transaction the parent sells to the subsidiary. The unrealised profit is eliminated in full either way. The difference is who bears it: upstream, the subsidiary's profit is reduced and minority interest shares it; downstream, the parent's profit is reduced entirely.

How do I treat unrealised profit in closing stock in consolidation?

Find the intra-group stock still unsold at year end at transfer price and apply the profit percentage on selling price. Reduce consolidated stock and the relevant profit by that amount. If the profit is given on cost, convert it to a percentage of selling price first.

How is a subsidiary acquired during the year consolidated?

Its results are included only from the date the parent gains control. Profit before that date is pre-acquisition and goes into cost of control. Profit after that date is post-acquisition and is shared between the parent and minority interest. Use a time basis if no other split is given.

What happens to the consolidated statements when a subsidiary is disposed of?

You include its results up to the date control ends. The difference between the proceeds and the parent's share of the carrying amount of its net assets, plus unamortised goodwill, is shown as profit or loss on disposal in consolidated profit and loss. Any retained investment is accounted for under AS 13, or under AS 23 if it becomes an associate.

Can a subsidiary have a different reporting date from the parent?

The statements should ideally be drawn up to the same date. If that is impracticable, adjust for significant transactions between the two dates. The difference between the reporting dates should not be more than six months, and the facts should be disclosed.