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CA Final · Financial Reporting · Ind AS 110 Consolidation Procedure for Subsidiaries

Kaveri Ltd sold goods costing ₹6,00,000 to its subsidiary Godavari Ltd for ₹8,00,000. At the reporting date, Godavari still holds all of these goods in inventory. Ignoring tax, what adjustment is made in Kaveri's consolidated financial statements?

The ₹2,00,000 unrealised profit is eliminated in full, reducing consolidated inventory from ₹8,00,000 to the original cost of ₹6,00,000 and reducing consolidated profit. Ind AS 110 requires profits on intragroup transactions recognised in inventory to be eliminated in full, not in proportion to ownership.

  1. AEliminate the ₹2,00,000 unrealised profit in full from consolidated inventory and profitCorrect
  2. BEliminate ₹2,00,000 from sales only, leaving inventory at ₹8,00,000
  3. CEliminate only the parent's ownership share of the ₹2,00,000 profit
  4. DEliminate no profit because the goods have not been sold outside the group, but disclose the transaction as a related party transaction

Explanation

Profits from intragroup transactions recognised in assets such as inventory are eliminated in full. The unrealised profit is 8,00,000 - 6,00,000 = ₹2,00,000, so consolidated inventory is carried at ₹6,00,000. Proportionate elimination is wrong because the standard requires full elimination.

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