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ACCA Strategic Professional · Strategic Business Reporting (International) · Professional and ethical behaviour in corporate reporting

Kestrel Group's parent plans to adjust the consolidation spreadsheet so that unrealised profit of 6 million on inventory sold to a 100%-owned subsidiary is not eliminated, arguing that the group is one entity and the profit will be realised eventually. The consolidation accountant, Li, knows the goods are all still held at the year end. Which response is correct?

Li should eliminate the full 6 million of unrealised profit from consolidated profit and inventory. IFRS 10 requires full elimination of intragroup profit still held in assets, regardless of ownership percentage. Leaving it in would knowingly overstate group results, breaching integrity, and halving it is still a misstatement.

  1. AAgree, since a wholly owned subsidiary makes elimination unnecessary
  2. BEliminate only half the profit as a prudent compromise
  3. CEliminate the 6 million in full against group profit and inventory, and refuse to present otherwise, as keeping it would overstate group resultsCorrect
  4. DEliminate the profit only from the parent's separate financial statements

Explanation

IFRS 10 requires intragroup profits in assets to be eliminated in full, so the unrealised 6 million reduces consolidated profit and inventory. Ownership percentage does not matter for a subsidiary. Leaving it in knowingly overstates profit, which conflicts with integrity; the separate parent accounts are not adjusted.

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