CAT / FIA FFA Syllabus G. Preparing Simple Consolidated Financial Statements - Unrealised Profit. - Notes ^{10 / 11}

Unrealised profit may arise within a group scenario on

1. Inventory where companies trade with each other

2. Non-current assets where one company has transferred an asset to the other company within the same group.

Adjustment for unrealised profit in inventory

• Determine the value of closing inventory which has been purchased from the other company in the group.

• Use mark-up or margin to calculate how much of that value represents profit earned by the selling company.

• Make the adjustments according to who the seller is

If the seller is the parent company:

Dr  Group retained earnings 

Cr Group inventory (deduct the profit when adding P’s inventory + S’s inventory on the face of the consolidated SFP).

If the seller is the subsidiary:

Dr Subsidiary retained earnings 

Cr Group inventory (deduct the profit when adding P’s inventory + S’s inventory on the face of the consolidated SFP).

Adjustment for unrealised profit in the transfer of non-current assets

Occasionally, a non-current asset is transferred within the group (say from a parent to a subsidiary).  

The parent may have manufactured the asset as part of its normal production (and therefore included the sale in revenue), or it may have transferred an asset previously used as part of its own non-current assets.  

If the transfer is done at cost, then, in the first case, the cost of the asset must be removed from both revenue and cost of sales. In the second case, no elimination would be required.

If one company sells non-current assets to another company in the same group at a profit, adjustments must be made for:

1. Profit on sale

2. Depreciation

The whole scenario has to be recreated as if the sales have never occurred.

The double-entry of this adjustment is: -

Dr Retained Earnings of the seller

Cr Non-Current Assets (P’s NCA + S’s NCA – Adjustment for UP)