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

Parent P Ltd sold goods costing ₹80,000 to its wholly owned subsidiary S Ltd for ₹100,000. At the reporting date, S Ltd still holds all of these goods in inventory. Ignoring tax, what adjustment is required on consolidation under the procedures in Ind AS 110?

Eliminate the ₹100,000 intragroup sale against cost of sales and reduce closing inventory by the ₹20,000 unrealised profit. Ind AS 110 requires intragroup transactions to be eliminated in full, including profits in inventory, so the group carries the goods at its original cost of ₹80,000.

  1. AEliminate the ₹100,000 sales and purchases only, with no inventory adjustment
  2. BEliminate sales and cost of sales of ₹100,000 and reduce closing inventory by ₹20,000Correct
  3. CReduce closing inventory by ₹100,000 and sales by ₹20,000
  4. DEliminate only half of the ₹20,000 profit because the subsidiary is wholly owned

Explanation

Intragroup income and expenses are eliminated in full, and profit in assets such as inventory is eliminated in full. Sales of ₹100,000 are removed against cost of sales, and the unrealised profit of ₹20,000 (100,000 − 80,000) is removed from closing inventory so inventory is carried at group cost of ₹80,000. Eliminating sales and purchases only leaves inventory overstated by ₹20,000.

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