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

Meru Ltd owns 80% of Sikhar Ltd. During the year Meru sold goods costing ₹6,00,000 to Sikhar for ₹8,00,000. At year end Sikhar still holds 25% of these goods, and ignoring tax, what adjustment is needed in the consolidated financial statements for unrealised profit?

The unrealised profit to eliminate is ₹50,000. Total profit on the intragroup sale is ₹2,00,000 and a quarter of the goods remain in inventory. Ind AS 110 requires profits in assets such as inventory to be eliminated in full, not just in proportion to the parent's holding.

  1. AEliminate ₹50,000 of unrealised profitCorrect
  2. BEliminate ₹40,000 of unrealised profit, being the parent's 80% share
  3. CEliminate ₹2,00,000 of unrealised profit
  4. DEliminate ₹1,50,000 of unrealised profit

Explanation

Profit on the sale is 8,00,000 - 6,00,000 = ₹2,00,000. Sikhar holds 25% of the goods, so unrealised profit in closing inventory is 2,00,000 x 25% = ₹50,000. Ind AS 110 requires profits on intragroup transactions recognised in assets such as inventory to be eliminated in full, so the 80% share (₹40,000) is wrong.

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