How are intragroup transactions eliminated under IFRS 10 B86?

Under IFRS 10.B86, all intragroup assets, liabilities, equity, income, expenses, and cash flows arising from transactions between entities within the group must be eliminated in full when preparing consolidated financial statements, including unrealised profits and losses embedded in intragroup balances. IFRS 10 Intragroup Eliminations operate as a mechanical but judgment-intensive process applied at each consolidation close. The key mechanics are: - Full elimination of balances (IFRS 10.B86(a)): Intragroup receivables and payables, loans, and any other balances between parent and subsidiaries—or between subsidiaries—are offset and eliminated in their entirety. This prevents gross-up of assets and liabilities on the consolidated statement of financial position. - Elimination of intragroup income and expenses (IFRS 10.B86(b)): Revenue recognised by the selling entity and the corresponding cost of sales or expense recognised by the buying entity must be eliminated, so that consolidated P&L reflects only transactions with third parties external to the group. - Elimination of unrealised profits in inventory (IFRS 10.B86(c) and IAS 27.20): Where goods transferred intragroup remain in the buyer's closing inventory, the unrealised profit element must be eliminated against consolidated inventory and retained earnings. The adjustment reduces both inventory carrying amount and group profit.

How should unrealised profit eliminations be handled when the selling subsidiary operates in a different tax jurisdiction from the buying entity, creating cross-border deferred tax complexity?

- Elimination of unrealised profits in non-current assets: Where a group entity sells a fixed asset to another group entity at a gain, the gain is eliminated and the asset is restated to its original cost basis for consolidation purposes. Depreciation is then recalculated based on that restated carrying amount (IAS 27.17 applied by analogy; IFRS 10.B86). - Tax effect of eliminations (IAS 12.15 and IAS 12.39): Many intragroup eliminations create temporary differences because the tax base of an asset in the buying entity differs from the consolidated carrying amount. Deferred tax must be recognised on these differences, typically as a deferred tax asset (reducing the elimination impact on consolidated equity). - Partial ownership — NCI impact (IFRS 10.B94): When a downstream sale occurs (parent sells to subsidiary), the unrealised profit is eliminated entirely against the parent's share. When an upstream sale occurs (subsidiary sells to parent or fellow subsidiary), the unrealised profit elimination is shared between the controlling interest and NCI in proportion to their ownership interests. Scenario: Parent (P) sells inventory costing €600,000 to its wholly-owned subsidiary (S) for €800,000. At year-end, 50% of that inventory remains unsold in S's books. The group tax rate is 25%. Unrealised profit in closing inventory = (€800,000 − €600,000) × 50% = €100,000

When an intragroup fixed asset transfer occurs mid-year, how is the elimination of the gain and the depreciation true-up calculated and presented in the consolidation workings?

| Account | Dr (€) | Cr (€) | |---|---|---| | Intragroup Revenue (P) | 800,000 | | | Intragroup Cost of Sales (S) | | 800,000 | | Account | Dr (€) | Cr (€) | |---|---|---| | Cost of Sales / Retained Earnings | 100,000 | | | Inventory | | 100,000 | Step 3 — Recognise deferred tax asset on elimination: | Account | Dr (€) | Cr (€) | |---|---|---| | Deferred Tax Asset | 25,000 | | | Tax Expense / Retained Earnings | | 25,000 | Net impact on consolidated equity: reduction of €75,000 (€100,000 unrealised profit less €25,000 deferred tax benefit). Consolidated inventory is restated to €700,000 (cost to the group: €600,000 × 50% remaining = €300,000, held at P's original cost proportion).

How does IFRS 10.B94 apply when a 70%-owned subsidiary sells inventory upstream to the parent — what is the precise NCI adjustment and journal entry?

- Failing to adjust depreciation on eliminated fixed asset gains: Groups eliminate the gain on an intragroup asset sale but forget to reverse the over-depreciation charged by the buying entity on the inflated cost base. This results in understated consolidated profit in subsequent periods. - Incorrect NCI allocation for upstream transactions: Allocating 100% of an upstream unrealised profit elimination against the controlling interest is a persistent error. Under IFRS 10.B94, the elimination reduces both controlling and non-controlling interests proportionally, affecting NCI in the consolidated statement of changes in equity. - Omitting deferred tax on inventory and fixed asset eliminations: Auditors frequently challenge consolidations where IAS 12 deferred tax entries are absent on elimination adjustments, particularly where the selling and buying entities are in different tax jurisdictions with differing tax bases. - IFRS 10.B86 — Core requirement to eliminate intragroup balances, transactions, income, expenses, and unrealised profits/losses in full. - IFRS 10.B94 — Attribution of unrealised profit elimination between controlling interest and NCI for upstream transactions. - IFRS 10.B87 — Clarifies that intragroup losses may indicate an impairment that should be recognised even after elimination. - IAS 12.15 / IAS 12.39 — Recognition of deferred tax arising from temporary differences created by consolidation eliminations, including the prohibition on recognising deferred tax on initial recognition exceptions. - IAS 36.90 — Impairment considerations when intragroup losses eliminated under B87 suggest a recoverable amount below carrying value.

IFRS 10 Intragroup Eliminations

IFRS 10 Intragroup Eliminations — Core Rule

Under IFRS 10.B86, all intragroup assets, liabilities, equity, income, expenses, and cash flows arising from transactions between entities within the group must be eliminated in full when preparing consolidated financial statements, including unrealised profits and losses embedded in intragroup balances.

How IFRS 10 Intragroup Eliminations Works

IFRS 10 Intragroup Eliminations operate as a mechanical but judgment-intensive process applied at each consolidation close. The key mechanics are:

Full elimination of balances (IFRS 10.B86(a)): Intragroup receivables and payables, loans, and any other balances between parent and subsidiaries—or between subsidiaries—are offset and eliminated in their entirety. This prevents gross-up of assets and liabilities on the consolidated statement of financial position.

Elimination of intragroup income and expenses (IFRS 10.B86(b)): Revenue recognised by the selling entity and the corresponding cost of sales or expense recognised by the buying entity must be eliminated, so that consolidated P&L reflects only transactions with third parties external to the group.

Elimination of unrealised profits in inventory (IFRS 10.B86(c) and IAS 27.20): Where goods transferred intragroup remain in the buyer's closing inventory, the unrealised profit element must be eliminated against consolidated inventory and retained earnings. The adjustment reduces both inventory carrying amount and group profit.

Elimination of unrealised profits in non-current assets: Where a group entity sells a fixed asset to another group entity at a gain, the gain is eliminated and the asset is restated to its original cost basis for consolidation purposes. Depreciation is then recalculated based on that restated carrying amount (IAS 27.17 applied by analogy; IFRS 10.B86).

Tax effect of eliminations (IAS 12.15 and IAS 12.39): Many intragroup eliminations create temporary differences because the tax base of an asset in the buying entity differs from the consolidated carrying amount. Deferred tax must be recognised on these differences, typically as a deferred tax asset (reducing the elimination impact on consolidated equity).

Partial ownership — NCI impact (IFRS 10.B94): When a downstream sale occurs (parent sells to subsidiary), the unrealised profit is eliminated entirely against the parent's share. When an upstream sale occurs (subsidiary sells to parent or fellow subsidiary), the unrealised profit elimination is shared between the controlling interest and NCI in proportion to their ownership interests.

IFRS 10 Intragroup Eliminations — Practical Example

Scenario: Parent (P) sells inventory costing €600,000 to its wholly-owned subsidiary (S) for €800,000. At year-end, 50% of that inventory remains unsold in S's books. The group tax rate is 25%.

Unrealised profit in closing inventory = (€800,000 − €600,000) × 50% = €100,000

Step 1 — Eliminate intragroup sale

Account	Dr (€)	Cr (€)
Intragroup Revenue (P)	800,000
Intragroup Cost of Sales (S)		800,000

Step 2 — Eliminate unrealised profit in inventory

Account	Dr (€)	Cr (€)
Cost of Sales / Retained Earnings	100,000
Inventory		100,000

Step 3 — Recognise deferred tax asset on elimination

Account	Dr (€)	Cr (€)
Deferred Tax Asset	25,000
Tax Expense / Retained Earnings		25,000

Net impact on consolidated equity: reduction of €75,000 (€100,000 unrealised profit less €25,000 deferred tax benefit). Consolidated inventory is restated to €700,000 (cost to the group: €600,000 × 50% remaining = €300,000, held at P's original cost proportion).

IFRS 10 Intragroup Eliminations — Common Pitfalls

Failing to adjust depreciation on eliminated fixed asset gains: Groups eliminate the gain on an intragroup asset sale but forget to reverse the over-depreciation charged by the buying entity on the inflated cost base. This results in understated consolidated profit in subsequent periods.

Incorrect NCI allocation for upstream transactions: Allocating 100% of an upstream unrealised profit elimination against the controlling interest is a persistent error. Under IFRS 10.B94, the elimination reduces both controlling and non-controlling interests proportionally, affecting NCI in the consolidated statement of changes in equity.

Omitting deferred tax on inventory and fixed asset eliminations: Auditors frequently challenge consolidations where IAS 12 deferred tax entries are absent on elimination adjustments, particularly where the selling and buying entities are in different tax jurisdictions with differing tax bases.

IFRS 10 Intragroup Eliminations — Key Paragraphs

IFRS 10.B86 — Core requirement to eliminate intragroup balances, transactions, income, expenses, and unrealised profits/losses in full.
IFRS 10.B94 — Attribution of unrealised profit elimination between controlling interest and NCI for upstream transactions.
IFRS 10.B87 — Clarifies that intragroup losses may indicate an impairment that should be recognised even after elimination.
IAS 12.15 / IAS 12.39 — Recognition of deferred tax arising from temporary differences created by consolidation eliminations, including the prohibition on recognising deferred tax on initial recognition exceptions.
IAS 36.90 — Impairment considerations when intragroup losses eliminated under B87 suggest a recoverable amount below carrying value.