Corporate Financial Reporting · Absorptions, Amalgamations, External Reconstruction

Inter-company Holdings, Unrealised Profit and Other Adjustments in Amalgamation

Updated 11 October 2026 · Fact-checked

These are adjustments made when the transferor and transferee have dealings with each other. Cancel mutual owings, treat shares held in each other as part of or deducted from consideration, remove unrealised profit in stock from the transferee's books, keep statutory reserves alive, and charge dissolution expenses to whoever bears them.

Understand Inter-company Holdings, Unrealised Profit and Other Adjustments

When two companies amalgamate, they often already deal with each other. One may owe the other money. One may hold shares of the other. One may have sold goods to the other at a profit that is still sitting in closing stock. After amalgamation these become dealings within a single entity, so they must be cleaned up.

Mutual owings. The transferee's debtors include the amount due from the transferor, and the transferor's creditors include the same amount. Once the companies merge, a company cannot owe itself. Cancel the debtor and the creditor. Where bills receivable or payable are involved, cancel them in the same way. Check whether the amount is actually included in the assets and liabilities taken over, as the question may give figures after reconciliation.

Inter-company shareholdings. If the transferee holds shares in the transferor, those shares are not paid for again. The transferee cannot issue shares to itself. So the consideration is calculated for the outside shareholders only, and the investment in the transferor's shares is cancelled. If the transferor holds shares in the transferee, the transferor's investment is an asset taken over. Read the scheme carefully, because the shares may be cancelled or may be treated as an asset taken over.

Unrealised profit in stock. If one company sold goods to the other and some are still unsold, the profit in that stock is not earned from outsiders. The closing stock is overstated by that profit. Reduce stock to cost. Then remove the profit from the seller's profit or reserve in the way the question or the scheme requires. Ind AS 103 does not fix one rule for this, so follow the question. Under acquisition accounting, the assets taken over are recorded at fair value.

Statutory reserves and expenses. Under the pooling method for common control combinations, Ind AS 103 Appendix C says the identity of reserves is preserved. Statutory reserves, such as a reserve a law requires, continue in the transferee's books in the same form. Expenses of liquidation or dissolution of the transferor are paid by the party the scheme names. The transferee's own expenses are charged to its profit and loss account.

Key rules to remember

Mutual owings: Transferee's debtor = Transferor's creditor → cancel both; Take only the net balance of other assets and liabilities. Include the cancellation in the balance sheet working.
Unrealised profit on closing stock: Profit on sales (P%): Unrealised profit = Stock × P ÷ 100. Profit on cost (P%): Unrealised profit = Stock × P ÷ (100 + P); Stock means the closing stock still held by the buyer, valued at the transfer price. State the profit basis in your working.
Pooling method: reserves: Reserves of transferor are carried into the transferee in the same form; Per Ind AS 103 Appendix C, the identity of reserves is preserved, for example General Reserve stays General Reserve.
Pooling method: difference: Difference = [Share capital issued + additional consideration in cash or other assets] − [Share capital of transferor] → transferred to capital reserve; Per Ind AS 103 Appendix C para 12, this difference is transferred to capital reserve, whichever way it arises. It is presented separately from other capital reserves, with its nature and purpose disclosed in the notes.
Shares in transferor held by transferee: Shares issued = (Total shares of transferor − Shares held by transferee) × Exchange ratio; The investment is cancelled and no new shares are issued against it.

How to solve Inter-company Holdings, Unrealised Profit and Other Adjustments questions

Use this order for any problem where companies deal with each other.

1Read the scheme and note the method: pooling for common control, or acquisition. Note which adjustments the question expects.
2List all inter-company items: debtors and creditors, bills, loans, shareholdings and stock bought from each other.
3Cancel mutual owings from both sides of the combined balance sheet. If the owing is shown as an asset in one list and liability in the other, remove both.
4Deal with shareholdings. Work out shares held by the transferee in the transferor and exclude them from the shares for which consideration is paid. Cancel the investment.
5Compute unrealised profit in closing stock using the margin on cost or on sales as stated. Reduce stock to cost and remove the profit from the seller's profit or reserve as the question or scheme requires.
6Under pooling, preserve the identity of reserves, including statutory reserves, and transfer the difference under Appendix C para 12 to capital reserve. Under acquisition, follow the treatment the question specifies and take assets at fair value.
7Record dissolution and amalgamation expenses with the party that bears them as per the scheme.
8Prepare the closing balance sheet or journal entries and check that assets equal liabilities.

Quickest way: Adjustment checklist before you start journalising

When to use it: Use when the question has many figures and little time, as in a 14-mark numerical.

Underline every phrase such as 'owes', 'holds shares', 'sold goods at profit', 'statutory reserve' and 'expenses'.
Write a one-line adjustment next to each underlined item before starting the main working.
Do the cancellation of owings first. It is mechanical and earns marks.
Compute unrealised profit separately in a working note. Show the formula with the profit basis stated.
Finish with a balance sheet check. If it does not tally, look for a missed shareholding or stock adjustment.

Common mistakes in Inter-company Holdings, Unrealised Profit and Other Adjustments

Leaving mutual owings in the balance sheet
Students copy each company's debtors and creditors as they are.
Fix: Always cancel an amount due from the transferor against the amount due to the transferee, and the other way round.
Issuing shares against shares the transferee already holds in the transferor
The exchange ratio is applied to the full share capital of the transferor.
Fix: Reduce transferor shares by the transferee's holding first, then apply the ratio.
Using the wrong base for unrealised profit
Students confuse profit on cost with profit on sales.
Fix: Profit on cost: stock × P ÷ (100 + P). Profit on sales: stock × P ÷ 100.
Merging statutory reserves into general reserve under pooling
Reserves are treated as one pool of surplus.
Fix: Ind AS 103 Appendix C requires the identity of reserves to be preserved. Keep each reserve under its own name.
Treating unrealised profit as a reduction of the transferor's stock when the transferee holds it
Students look at who made the sale rather than who holds the stock.
Fix: Adjust the stock lying with the buyer. The profit is in the buyer's closing stock.

Worked examples

Example 1

Alpha Ltd takes over Beta Ltd. Alpha's debtors are ₹5,00,000, including ₹60,000 due from Beta. Alpha's creditors are ₹4,00,000. Beta's debtors are ₹2,00,000. Beta's creditors are ₹3,00,000, including ₹60,000 due to Alpha. Find the debtors and creditors of the combined business after the amalgamation.

Show the solution

Combined debtors before cancellation = ₹5,00,000 + ₹2,00,000 = ₹7,00,000.
Combined creditors before cancellation = ₹4,00,000 + ₹3,00,000 = ₹7,00,000.
Cancel the mutual owing of ₹60,000 from debtors: ₹7,00,000 − ₹60,000 = ₹6,40,000.
Cancel the same ₹60,000 from creditors: ₹7,00,000 − ₹60,000 = ₹6,40,000.

Answer: After the amalgamation, debtors are ₹6,40,000 and creditors are ₹6,40,000.

Example 2

Gamma Ltd sold goods to Delta Ltd at cost plus 25%. Delta's closing stock includes ₹1,50,000 of these goods at the transfer price. Delta is amalgamated into Gamma. Compute the unrealised profit in this stock and state the adjustment.

Show the solution

Profit is 25% on cost, so selling price is 125% of cost.
Unrealised profit = ₹1,50,000 × 25 ÷ 125.
₹1,50,000 × 25 = ₹37,50,000.
₹37,50,000 ÷ 125 = ₹30,000.
Stock at cost = ₹1,50,000 − ₹30,000 = ₹1,20,000.
Reduce the stock taken over by ₹30,000, so it is stated at ₹1,20,000.
Remove the ₹30,000 profit from the seller's (Gamma's) profit or reserve, in the way the question or scheme requires, since the profit has not been earned from outsiders.

Answer: Unrealised profit is ₹30,000. Stock is stated at ₹1,20,000, and the ₹30,000 is eliminated from the seller's profit or reserve as the question or scheme requires.

Exam tips

Read the question for hidden inter-company items. They are usually in a note below the balance sheets.
State the profit basis in your working. Examiners give marks for the correct formula even if arithmetic slips.
In pooling problems, keep each reserve under its original name and write that in your answer.
If shares are held between the companies, show a working note for shares issued to outside shareholders only.
Show the balance sheet check at the end, since many errors show up there.

Practice questions from Absorptions, Amalgamations, External Reconstruction

Inter-company Holdings, Unrealised Profit and Other Adjustments in other exams

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

Inter-company Holdings, Unrealised Profit and Other Adjustments: frequently asked questions

Why are inter-company owings cancelled in amalgamation?

After amalgamation the two companies become one entity. A company cannot be a debtor or creditor of itself, so the asset and liability are removed together.

How do I calculate unrealised profit in stock?

Take the stock still held by the buyer at the transfer price. If profit is on cost, multiply by P ÷ (100 + P). If profit is on sales, multiply by P ÷ 100.

What happens to statutory reserves under the pooling method?

Ind AS 103 Appendix C says the identity of reserves is preserved. They appear in the transferee's statements in the same form as in the transferor's.

What if the transferee holds shares of the transferor?

No new shares are issued against them. Work out consideration only for outside shareholders and cancel the investment.