When one group company sells stock to another at a profit and the goods are still held inside the group at the year end, that profit has not been earned from anyone outside the group. On consolidation it is removed by reducing group stock to its original cost to the group and reducing group profit by the same amount. FRS 102 paragraph 9.15 requires the full profit to be eliminated, not just the parent’s share.

Why is the profit unrealised from the group’s point of view?

Consolidated accounts treat the parent and its subsidiaries as one reporting entity (FRS 102 paragraph 9.13). If Company A sells goods to Company B at a mark up, A records a profit and B records stock at the price it paid. Looked at as one business, nothing has been sold: the goods have moved from one warehouse to another. The group only makes a profit when the goods are sold to an outside customer.

The ACCA technical factsheet on FRS 102 consolidations puts it this way: until the goods are sold outside the group the profit is not realised, and if it were not removed group stock would be overstated. In stock valuation terms, Section 13 measures inventories at the lower of cost and estimated selling price less costs to complete and sell (paragraph 13.4), and cost for the group means what the group originally paid, not the internal transfer price. See stock valuation for the general rules.

What does the standard actually require?

  • FRS 102 paragraph 9.15: profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and property, plant and equipment, are eliminated in full. Intragroup losses may indicate an impairment, and Section 29 applies to timing differences arising from the elimination.
  • Company law: Schedule 6 paragraph 6(2) to SI 2008/410 requires profits and losses on transactions between consolidated undertakings that are included in the book value of assets to be eliminated. Paragraph 6(3) would permit elimination only in proportion to the group’s interest in the shares, but FRS 102 requires full elimination, so that option is not used by an FRS 102 group.
  • IFRS: IFRS 10 paragraph B86(c) has the same full elimination rule for groups reporting under IFRS, with IAS 12 applying to the resulting temporary differences.

How do you calculate the figure?

Three pieces of information are needed: the internal selling price of the goods still held, the seller’s profit percentage on them, and whether that percentage is a mark up on cost or a margin on selling price.

  • Margin. If the seller earns a 25% margin, the unrealised profit is 25% of the stock value at transfer price. Stock of £40,000 contains £10,000 of profit.
  • Mark up. If the seller adds 25% to cost, the profit is 25/125 of the transfer price. Stock of £40,000 contains £8,000 of profit.

Only the goods still on hand at the year end count. If the buyer has sold 70% of the goods outside the group, only the 30% remaining carries unrealised profit. Goods in transit at the year end, invoiced by the seller but not yet recorded by the buyer, are still group stock and are included in the calculation once the in transit adjustment is made.

What is the consolidation entry?

The ACCA factsheet shows the adjustment as:

  • Debit cost of sales (reducing group profit)
  • Credit inventory (reducing group stock to cost to the group)

This sits alongside, not instead of, the cancellation of the intra group sale itself (debit turnover, credit cost of sales for the full invoiced amount), covered in eliminating intra group balances and transactions. The ACCA article on common consolidation errors also stresses that the reduction belongs to the profit or retained earnings of the company that made the sale.

In the following year the goods are usually sold to outsiders. The profit then becomes realised for the group, so last year’s adjustment reverses: opening group reserves are lower by the unrealised amount brought forward, and the current year’s group cost of sales is reduced so that the profit is recognised in the year the outside sale happens. The only lasting effect is on timing.

Who bears the adjustment when there is a non controlling interest?

If the parent sold the goods to a partly owned subsidiary, the profit sat in the parent’s books, so the whole adjustment comes out of the parent’s shareholders’ share of group profit. The non controlling interest is unaffected.

If the partly owned subsidiary was the seller, there is a choice. The ACCA factsheet notes that FRS 102 does not specify an approach and that in practice two are used:

  1. charge the non controlling interest with its proportionate share of the unrealised profit, which treats the adjustment as reducing the selling subsidiary’s own profit; or
  2. charge none of it to the non controlling interest, reflecting their entitlement to a full share of the profit the subsidiary recorded.

Either way the full profit is removed from group stock; the choice only changes how the reduction in group profit is split between the parent’s owners and the non controlling interest. The group should pick a policy and apply it consistently.

Does the adjustment create deferred tax?

Usually, yes. The selling company has paid or will pay corporation tax on its profit, because tax is computed on each company’s own accounts, but the group accounts have deferred that profit to a later period. Paragraph 9.15 brings this within Section 29, so a timing difference arises and a deferred tax asset is normally recognised in the group accounts, reversing when the stock is sold outside the group. Where it is significant, the rate used should reflect enacted rates expected to apply on reversal (paragraph 29.12). The main rate of corporation tax for the financial year beginning 1 April 2026 is 25%, with a 19% small profits rate. See deferred tax under FRS 102.

How does it work through in numbers?

Illustration only. Parent owns 80% of Sub. Sub sells goods to Parent at a mark up of 25% on cost. During the year Sub sold goods to Parent for £150,000. At the year end Parent still holds £50,000 of them at transfer price. Assume the group charges the non controlling interest its share where the subsidiary is the seller, and ignore tax.

Step Working Amount
Cancel intra group sale Debit turnover, credit cost of sales £150,000
Unrealised profit £50,000 × 25/125 £10,000
Reduce group stock and profit Debit cost of sales, credit inventory £10,000
Share borne by non controlling interest 20% × £10,000 £2,000
Share borne by parent’s owners 80% × £10,000 £8,000

Group stock falls by the full £10,000. If Parent had been the seller instead, the full £10,000 would reduce the parent’s owners’ share and none would be charged to the non controlling interest.

What if the goods were sold at a loss?

An intragroup loss on stock still held is also eliminated under paragraph 9.15, but the same paragraph warns that it may indicate impairment. If the transfer price reflects a genuine fall in value, for example obsolete stock sold at its realisable value, the group still needs to write the stock down under paragraph 13.4. Reversing the loss mechanically would put the stock back at a cost the group could not recover.

Where do people go wrong?

  • Using the mark up percentage as if it were a margin, which overstates the adjustment.
  • Eliminating only the parent’s percentage of the profit in a partly owned group. The full profit comes out; only the split of the charge changes.
  • Forgetting to reverse the opening adjustment, which double counts the reduction in the second year.
  • Ignoring goods in transit at the year end.
  • Missing fixed assets. The same rule applies to plant or property transferred between group companies at a profit, with the excess depreciation reversed each year until the asset is sold or fully depreciated.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.