The Consolidated Statement of Financial Position: Fair Values, Unrealised Profit and Intra-group Items

The basic consolidation assumes that the subsidiary’s own balances are the right figures to add, and that the two companies have not traded with each other. In practice neither is true.

The subsidiary’s assets may be worth more or less than the figures in its books on the day it was bought, goods may have been sold between group companies at a profit that the group has not yet earned. The companies may owe each other money.

This topic covers the fair value exercise at acquisition and the extra depreciation that follows, intra-group balances and cash in transit, unrealised profit on inventory and on transferred non-current assets, and loans and dividends within the group. The next topic starts the consolidated statement of profit or loss.

These adjustments appear in the group questions of recent diets. In May Diet, 2024, Question 2, a plant of the subsidiary was revalued at acquisition and inventory included goods bought from the other company at a mark-up of 25%. In May Diet, 2025, Question 3, development costs and a brand were adjusted at acquisition and part of the goods were still held in inventory.

In November Diet, 2025, Question 4, a leased property had a fair value above its carrying amount and goods transferred within the group were partly in inventory. Read the basic approach and double entry first.

Fair value adjustments at acquisition

The subsidiary’s identifiable assets and liabilities are measured at their acquisition-date fair values in the consolidation, whatever the subsidiary’s books show. Typical adjustments are land and buildings, plant and equipment, inventory, and recognising items the subsidiary had not recognised, such as a brand or capitalised development costs that meet the criteria, and contingent liabilities that are present obligations.

Adjusting does not change the subsidiary’s own books. It is done on the consolidation working papers.

• At acquisition: the net assets table has a line for the fair value adjustment. It raises (or lowers) the net assets at acquisition, so goodwill falls (or rises), and the NCI at acquisition under the proportionate method rises.
• At the reporting date: the fair value adjustment is carried at its original amount for non-depreciable items such as land, and at the original amount less the cumulative extra depreciation for depreciable ones.
• Extra depreciation: depreciation on the uplift over the remaining life reduces the subsidiary’s profit in the consolidation. Post-acquisition profit is the change in retained earnings less the extra depreciation, so both the group’s and the NCI’s shares are reduced.

For example, in the previous topic’s example S’s land has a carrying amount of ₦100,000 and a fair value of ₦160,000 (uplift ₦60,000), and its plant has a carrying amount of ₦80,000 and a fair value of ₦110,000, with five years of life remaining (uplift ₦30,000, extra depreciation ₦6,000 a year). One year later:

Goodwill = ₦300,000 + NCI 25% × ₦260,000 (₦65,000) − ₦260,000 = ₦105,000. Post-acquisition profit = ₦324,000 − ₦260,000 = ₦64,000 (the retained earnings movement of ₦70,000 less the extra depreciation of ₦6,000). Consolidated retained earnings = ₦560,000 + 75% × ₦64,000 = ₦608,000. NCI = ₦65,000 + 25% × ₦64,000 = ₦81,000 (25% of ₦324,000). Property, plant and equipment is increased by the fair value adjustments still carried, ₦84,000.

Intra-group balances, loans and dividends

• Receivables and payables. A balance owed by one group company to another is an asset in one set of books and a liability in the other. Both are cancelled on consolidation. If the two figures differ, find the reason: goods or cash in transit. For cash in transit, add it to the receiving company’s cash and deduct it from the receivable. A payment of ₦12,000 sent on the last day and recorded by the payer but not received: Dr Cash ₦12,000, Cr Receivables ₦12,000, then cancel the remaining balances.
• Loans. A loan from one group company to another, and the interest, are cancelled: the loan asset against the loan liability, and the interest income against the interest expense.
• Dividends. A dividend paid by the subsidiary to the parent is cancelled against the parent’s dividend income. If a dividend has been declared but not paid, the parent’s receivable for its share is cancelled against the same part of the subsidiary’s payable, and the rest (the part due to the non-controlling interest) remains as a liability of the group. If S declares a dividend of ₦20,000 and P owns 80%, P has a receivable of ₦16,000 which cancels against ₦16,000 of S’s payable, leaving ₦4,000 payable to outsiders.

Unrealised profit

A group cannot make a profit by selling to itself. If one group company sells goods to another at a profit and the buyer still holds them at the year end, the profit is unrealised from the group’s point of view: it is realised only when the goods are sold outside. The consolidation removes it:

1. Calculate the unrealised profit: the intra-group sales value of the goods still held × the profit element. For a mark-up of 25% on cost, the profit is 25/125 of the selling price; for a margin of 20% on selling price, it is 20%.
2. Reduce closing inventory in the consolidated statement by that amount.
3. Reduce retained earnings: of the seller. If the parent sold, the whole amount reduces the parent’s retained earnings in the consolidated working. If the subsidiary sold, the amount reduces the subsidiary’s retained earnings in the net assets table at the reporting date, so the post-acquisition profit falls and the loss is shared between the parent and the NCI.

For example, goods invoiced at ₦120,000 at cost plus 25% have been sold to a group company, which still holds half of them. The unrealised profit is ₦120,000 × ½ × 25/125 = ₦12,000. If the parent sold them, consolidated retained earnings fall by ₦12,000. If an 80% subsidiary sold them, consolidated retained earnings fall by 80% × ₦12,000 = ₦9,600 and the NCI by ₦2,400.

Transfers of non-current assets

If a group company sells a non-current asset to another at a profit, the buyer’s carrying amount is too high from the group’s point of view, and it depreciates the inflated amount. At the reporting date, reduce the asset by the unrealised profit less the excess depreciation charged since the transfer, and reduce the seller’s retained earnings by the same figure.

For example, P sells equipment with a carrying amount of ₦60,000 to S for ₦90,000 at the start of the year (a profit of ₦30,000); S depreciates at 10% a year. The excess depreciation for the year is 10% × ₦30,000 = ₦3,000, so the adjustment at the year end is ₦30,000 − ₦3,000 = ₦27,000, deducted from property, plant and equipment and from P’s retained earnings.

The ideas in more depth

Why the fair value adjustment depreciates

The group has paid for a plant at its fair value, which is higher than the book value in the subsidiary. Over the plant’s life, the group uses up that higher amount. The subsidiary’s books charge depreciation on the lower figure, so the consolidation adds the extra charge to match the group’s cost.

Why the seller bears the unrealised profit

The profit was recorded in the seller’s statements. If the seller is the subsidiary, part of its reserves belongs to the NCI, who are affected by the elimination. If the parent sold, the profit was the parent’s alone, so the parent’s reserves bear it all.

Sources and references

• International Financial Reporting Standard (IFRS) 10 Consolidated Financial Statements: elimination of intra-group balances, transactions and unrealised profits; IFRS 3 Business Combinations: fair values at the acquisition date.

These points are stated as at 5 November 2026.

Worked examples

1. Unrealised profit.
   ₦90,000 × 40% × 50/150 = ₦12,000.
2. Inventory. Reduce by ₦12,000.
3. Reserves. Group retained earnings ₦8,400 (70%); NCI ₦3,600 (30%).

1. Profit.
   ₦90,000 − ₦60,000 = ₦30,000.
   Excess depreciation. 10% × ₦30,000 = ₦3,000.
2. Adjustment. Reduce equipment and P’s retained earnings by ₦27,000.

1. Cancel. P’s receivable ₦16,000 against ₦16,000 of S’s payable.
2. Remaining. ₦4,000 payable to the non-controlling interest stays in current liabilities.

How to answer in the exam

• Add the fair value lines to the net assets table, at both dates, with the extra depreciation shown separately.
• Work out unrealised profit with the right fraction (mark-up or margin), then note who sold.
• Cancel intra-group balances and state what is left (cash in transit, dividends to the NCI).
• Check that both sides of the statement still agree.

Common mistakes in the exam

• Using the subsidiary’s carrying amounts in the goodwill working when fair values are given.
• Forgetting the extra depreciation, or charging it to the parent only.
• Using 25% of the selling price for a 25% mark-up on cost.
• Charging all the unrealised profit to the parent when the subsidiary sold the goods.
• Cancelling an intra-group balance without allowing for cash in transit.
• Cancelling the whole subsidiary dividend payable instead of only the parent’s share.

Quick revision

• Fair value adjustments: in net assets at acquisition; less extra depreciation at the reporting date.
• Unrealised profit: mark-up fraction = m/(100+m); margin = % of selling price. Remove from inventory and the seller’s retained earnings.
• Non-current asset transfer: profit less excess depreciation.
• Cancel intra-group balances, loans and the parent’s share of dividends; add cash in transit.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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