Intragroup inventory: remove the profit still sitting in closing stock
Agreeing intercompany balances and cancelling internal sales still leaves one consolidation job. When one group company sells goods to another at a profit and some remain unsold at the reporting date, the group must reduce that stock to its own cost. Under UK-adopted full IFRS for a 2026 annual period, profit embedded in closing inventory is eliminated in full and recognised when the goods are sold outside the group.
Matching balances is only half the job
IFRS 10 requires intragroup balances, transactions, income and expenses to be eliminated in full, including profits recognised in inventory. Until goods bought from another group company are sold outside the group, the seller's profit on them is unrealised from the group's point of view. Intragroup losses may indicate an impairment, so an internal loss is not reversed mechanically. Uniform accounting policies apply.
Full elimination also applies to subsidiaries that are not wholly owned, though allocating adjusted profit to non-controlling interests is separate work, and sales to associates and joint ventures follow IAS 28 instead. This article covers a parent and wholly owned subsidiary with the same currency and reporting date, without early adoption of IFRS 18 or the 2027 IAS 21 presentation-currency amendment. It is not FRS 102, IFRS for SMEs, Ind AS or US GAAP.
Sources and context, checked :
Worked hypothetical: one batch, 40% still in stock
The following figures are hypothetical, in GBP. The parent buys one homogeneous batch externally for 80,000 and transfers all of it to its wholly owned subsidiary for 100,000. The subsidiary sells 60% externally for 90,000 and holds 40% at year end. Both use the same cost basis and policies, with no acquisition uplifts, foreign exchange, freight, damage or net realisable value shortfall. Intragroup balances are already reconciled.
The parent's transfer profit of GBP20,000 is a 25% markup on cost but a 20% margin on the transfer price. Closing stock at transfer price is GBP40,000, so the profit inside it is 40% × 20,000 = GBP8,000, or 20% × 40,000. Group stock is GBP32,000. Applying the 25% markup to GBP40,000 would wrongly remove GBP10,000.
Combined entity gross profit is the parent's GBP20,000 plus the subsidiary's 90,000 - 60,000 = GBP30,000, total GBP50,000. Removing GBP8,000 leaves GBP42,000. External sales of GBP90,000 less the original GBP48,000 cost of the 60% sold also give GBP42,000.
| Measure | Calculation | GBP |
|---|---|---|
| Total internal profit | 100,000 - 80,000 | 20,000 |
| Unsold transfer-price stock | 100,000 × 40% | 40,000 |
| Profit still in stock | 20,000 × 40% | 8,000 |
| Group inventory | 40,000 - 8,000 | 32,000 |
| Group gross profit | 20,000 + 30,000 - 8,000 | 42,000 |
Sources and context, checked :
Consolidation entries and the release next period
These entries are made only on consolidation; neither entity changes its own GBP100,000 sale or purchase. Dr internal revenue 100,000, Cr cost of sales 100,000 cancels the internal trading but leaves group gross profit unchanged, so Dr cost of sales 8,000, Cr inventory 8,000 follows. Removing the matched receivable and payable is a separate entry.
Next period, assume the remaining goods are all sold externally with no other change. In a fresh worksheet built from entity books, Dr opening group retained earnings 8,000, Cr current group cost of sales 8,000 releases the elimination. Any units still unsold carry their residual elimination. Check system carryforwards so the release is not posted twice, and trace actual quantities and margins rather than one group-wide average.
Sources and context, checked :
Deferred tax is a separate, conditional step
IAS 12 compares the consolidated carrying amount with the relevant tax base. A deductible temporary difference supports an asset only where taxable profit is probable, subject to exceptions, using rates enacted or substantively enacted by the reporting date, and the effect generally goes to profit or loss.
As an optional hypothetical extension, assume a legally deductible tax base of GBP40,000 for the remaining stock, the parent taxed on its transfer profit, separate returns, a 25% enacted rate expected on reversal and probable sufficient taxable profit. Carrying amount 32,000 against tax base 40,000 gives a deductible difference of 8,000: Dr deferred tax asset 2,000, Cr deferred tax income 2,000, leaving a net profit reduction of 6,000. A tax group or different tax base can remove that asset. These assumptions need legal evidence, are not UK transfer-pricing advice, and the next-period tax release needs its own analysis.
Keep a lot or SKU schedule of original group cost, transfer price, quantity transferred, quantity unsold in each group entity, later external sale evidence, and opening and current eliminations. Review tax base and recovery separately.