Corporate Financial Reporting · Consolidated Financial Statements and Separate Financial Statements

Intra-group Transactions and Unrealised Profit Elimination in Consolidation

Updated 11 October 2026 · Fact-checked

Consolidated statements show the group as a single economic entity, so you remove everything the group does with itself. Eliminate inter-company balances, sales, purchases, dividends and interest in full. Remove profit sitting in closing stock or transferred fixed assets. Downstream, charge the parent. Upstream, share the charge with non-controlling interest.

Understand Intra-group Transactions and Unrealised Profit Elimination

Ind AS 110 defines consolidated financial statements as those of a group where assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. A single entity cannot sell to itself or owe money to itself. So any such dealing must disappear from the consolidated numbers.

Paragraph B86(c) says you eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between group entities. Profits or losses on intragroup transactions that sit in assets such as inventory and fixed assets are also eliminated in full. Intragroup losses may signal impairment that needs recognising.

The key idea for stock is this. When P sells goods to S at a profit and S still holds them at year end, the group has not yet sold them outside. The profit is unrealised. You cut the profit and cut the stock value back to the group's cost. Once S sells the goods outside the group, the profit becomes realised.

Direction matters. In a downstream sale (parent to subsidiary), the profit was booked by the parent, so the whole adjustment reduces the parent's share of profit. In an upstream sale (subsidiary to parent), the profit was booked by the subsidiary, so the adjustment is shared between the parent and non-controlling interest (NCI) in their profit-sharing ratio. This is the usual approach in exam answers, so follow it.

For fixed assets, remove the unrealised profit on transfer. Then correct depreciation: the buyer depreciates on the inflated price, but the group should depreciate on the original carrying amount. The excess depreciation is added back. Ind AS 12 applies to the temporary differences created by these eliminations, so deferred tax may arise if the question gives a tax rate. Ind AS 110 B87 and para 19 also require uniform accounting policies across the group.

Key rules to remember

Unrealised profit in closing stock: Unrealised profit = Closing stock from group entity × Profit % included in transfer price; Profit % must be on the same base as the stock value, which is the selling price paid by the buyer.
Markup on cost to profit on selling price: Profit on selling price = Markup ÷ (100 + Markup); A 25% markup on cost is 25 ÷ 125 = 20% of selling price. Use this before applying to stock at invoice value.
Downstream elimination: Reduce parent's profit by 100% of unrealised profit; reduce stock by the same amount; NCI is not affected.
Upstream elimination: Reduce subsidiary's profit by unrealised profit; NCI bears NCI % × amount, parent bears the balance; Stock is still reduced by the full amount.
Fixed asset transfer: Unrealised profit = Transfer price − Carrying amount in seller's books; Excess depreciation = Depreciation on transfer price − Depreciation on original carrying amount; Net reduction in asset at year end = Unrealised profit − cumulative excess depreciation.
Inter-company balances and dividends: Debtors in one entity = Creditors in the other, eliminate both; dividend income of parent from subsidiary eliminated against dividend paid by subsidiary; Eliminate in full under Ind AS 110 B86(c). Reconcile goods or cash in transit first. NCI's share of dividend remains in NCI.

How to solve Intra-group Transactions and Unrealised Profit Elimination questions

Use the same order for every intra-group question. It stops you from missing a leg of the adjustment.

1List every intra-group item in the question: sales and purchases, balances, loans and interest, dividends, stock and fixed asset transfers.
2Identify the direction of each transfer (upstream or downstream) and the percentage of NCI.
3Convert margins to profit on selling price if a markup on cost is given.
4Compute unrealised profit on stock still held at year end. For fixed assets, compute profit on transfer and the excess depreciation.
5Eliminate the revenue and purchases for the full intra-group sales. Eliminate balances, interest and dividends in full.
6Allocate the adjustment: downstream to the parent only; upstream to the subsidiary's profit, shared with NCI.
7Reduce stock or fixed assets to the group's cost. Add deferred tax only if a tax rate is given.
8Show the effect on consolidated profit, NCI, retained earnings and the balance sheet. Check that the balance sheet still balances.

Quickest way: One-line adjustment journal approach

When to use it: Use this when time is short and you only need the effect on consolidated profit, NCI and assets.

Write the unrealised profit number in one line. Stock or asset is reduced by it.
Tag it D (downstream) or U (upstream).
If D, deduct from parent's profit. If U, deduct from subsidiary's profit before splitting with NCI.
For sales, cancel the full invoice value from both revenue and purchases (or cost of sales).
Cancel mutual balances. Tick off in-transit items.
Do a final balance sheet check: asset reduction equals the profit reduction (plus deferred tax if any).

Common mistakes in Intra-group Transactions and Unrealised Profit Elimination

Eliminating only the profit portion of intra-group sales instead of the full sales value.
Students focus on unrealised profit and forget the sale and purchase also have to go.
Fix: Do two separate steps: cancel the full sales against purchases, then remove unrealised profit from closing stock.
Applying a markup on cost directly to stock valued at selling price.
The margin base is not checked.
Fix: Convert the markup to profit on selling price using markup ÷ (100 + markup) before multiplying.
Sharing unrealised profit with NCI in a downstream sale.
Students apply the NCI percentage mechanically to every case.
Fix: Ask who sold. If the parent sold, the whole elimination hits the parent. NCI shares only for upstream sales.
Forgetting the excess depreciation on a transferred fixed asset.
The profit is removed but the buyer's depreciation on the higher price is left in.
Fix: Add back the depreciation charged on the profit element for each year since transfer.
Eliminating the parent's dividend income but still treating the full dividend as paid from group profit, including the NCI share.
Dividend, retained earnings and NCI are mixed up.
Fix: Eliminate dividend received by the parent against the subsidiary's dividend paid. The NCI's share of the dividend reduces NCI and stays outside the group.
Eliminating balances without reconciling goods or cash in transit.
The books of the two companies do not agree and students just cancel the larger figure.
Fix: Adjust the in-transit item first in the receiving company's books so both balances match, then eliminate.

Worked examples

Example 1

Siddhi Ltd holds 80% of Tejas Ltd. During the year Tejas sold goods to Siddhi for ₹6,00,000 at a profit of 25% on selling price. At year end Siddhi held goods worth ₹2,40,000 (at invoice price) from this purchase. Ignore tax. Show the elimination and its effect.

Show the solution

Direction: Tejas (subsidiary) sold to Siddhi (parent), so this is upstream.
Eliminate intra-group sales: reduce consolidated revenue by ₹6,00,000 and reduce purchases (cost of sales) by ₹6,00,000.
Unrealised profit = 25% × ₹2,40,000 = ₹60,000.
Reduce closing stock in the consolidated balance sheet by ₹60,000 (from ₹2,40,000 to the group's cost of ₹1,80,000).
Reduce Tejas's profit by ₹60,000 before splitting with NCI.
NCI share = 20% × ₹60,000 = ₹12,000. Parent's share = 80% × ₹60,000 = ₹48,000.

Answer: Stock is reduced by ₹60,000 to ₹1,80,000. Consolidated profit falls by ₹60,000, of which ₹48,000 is borne by the owners of the parent and ₹12,000 by NCI.

Example 2

On 1 April 2026 Parth Ltd (parent) sold a machine to its wholly owned subsidiary Quest Ltd for ₹10,00,000. Its carrying amount in Parth's books was ₹8,00,000. Quest depreciates it straight-line over 5 years with nil residual value; the remaining life is also 5 years from the group's view. Ignore tax. Show the adjustments for the year ended 31 March 2027.

Show the solution

Direction: parent to subsidiary, so downstream.
Unrealised profit on transfer = ₹10,00,000 − ₹8,00,000 = ₹2,00,000.
Depreciation charged by Quest = ₹10,00,000 ÷ 5 = ₹2,00,000.
Depreciation on the group's cost = ₹8,00,000 ÷ 5 = ₹1,60,000.
Excess depreciation = ₹2,00,000 − ₹1,60,000 = ₹40,000, which is added back.
Net reduction in consolidated profit = ₹2,00,000 − ₹40,000 = ₹1,60,000. This falls entirely on the parent.
Check the asset: Quest's books show ₹10,00,000 − ₹2,00,000 = ₹8,00,000. The group's figure is ₹8,00,000 − ₹1,60,000 = ₹6,40,000. The difference is ₹1,60,000, which equals the net profit reduction.

Answer: Consolidated profit is reduced by ₹1,60,000 (₹2,00,000 profit removed, ₹40,000 depreciation added back), all against the parent. The machine is carried at ₹6,40,000 in the consolidated balance sheet.

Exam tips

Write the direction (upstream or downstream) beside each transaction before you calculate. It decides the NCI share.
Check whether margin is given on cost or on selling price. Examiners often use this trap.
Show the sales elimination and the unrealised profit elimination as separate lines so you earn steps even if one number slips.
For fixed assets in later years, remember the opening retained earnings adjustment: unrealised profit less excess depreciation of earlier years.
State the basis in one line, for example 'Eliminated in full as per Ind AS 110 B86(c)'. It supports your answer in written questions.

Practice questions from Consolidated Financial Statements and Separate Financial Statements

Intra-group Transactions and Unrealised Profit Elimination in other exams

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

Intra-group Transactions and Unrealised Profit Elimination: frequently asked questions

What is unrealised profit in consolidation?

It is profit made by one group entity on selling goods or assets to another group entity that is still held within the group. Since the group has not sold it outside, the profit is removed from consolidated figures. Ind AS 110 requires such profits in inventory and fixed assets to be eliminated in full.

Who bears the unrealised profit in an upstream transaction?

The subsidiary made the profit, so the elimination reduces its profit. It is then shared between the parent and non-controlling interest in their holding ratio. The stock or asset is still reduced by the full amount.

How is an intra-group sale of a fixed asset treated?

Remove the profit on the transfer from the asset and from the seller's profit. Then add back the extra depreciation the buyer charged on the inflated cost. The asset ends up at what it would have been had the group never traded internally.

Does the rule differ for associates and joint ventures?

Yes. Under Ind AS 28 para 28, gains and losses on upstream and downstream transactions with an associate or joint venture are recognised only to the extent of unrelated investors' interests. The investor's share of the gain or loss is eliminated, not 100%.