This is from the “Accounting Makes Cents” podcast episode #83 released on Monday, 24 February 2025.

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So as a continuation of the series, this is the second episode on consolidated group accounts. For today, I’d like us to cover intra-group trading or transactions. This is a topic that’s fundamental to understanding how group financial statements work but can also be a major source of confusion. We’ll go through what it is, the key accounting adjustments, and why it matters in real life. 

So if you’ve ever found yourself wondering why companies eliminate certain transactions when consolidating their financial statements, this episode is for you. Let’s dive in.

Jump to show notes.

What is intra-group trading? 

Simply put, this is when companies within the same corporate group buy and sell goods or services between each other.

Let’s take a basic example. Say we have Parent Co. and its subsidiary, Sub Co. Parent Co. manufactures windows, and Sub Co. sells them to customers. If Parent Co. sells windows to Sub Co., that’s an intra-group transaction.

On the surface, this seems straightforward—one company sells, the other buys. But here’s where things get tricky: when we consolidate financial statements, the group is treated as a single entity. That means any profit that hasn’t been realised outside the group can’t be included in the final numbers. So what does that mean?

You see, when a company within a group (e.g., Parent Co.) sells goods or services to another company within the same group (e.g., Sub Co.), any profit on that transaction is considered unrealised until the goods or services are sold to an external party (outside the group).

Since consolidated financial statements present the group as a single economic entity, the group cannot recognise profit from internal transactions because the group, as a whole, has not yet earned that profit from an external party.

Which brings us to the challenge: how do we account for these transactions properly?

Accounting challenges of intra-group transactions

Here’s the issue: intra-group transactions can inflate revenue and profits if they’re not adjusted properly. The most common problem is unrealised profits.

Let’s continue with our example. Suppose Parent Co. sells inventory to Sub Co. for $10,000, but at a 20% markup from cost. That means the original cost was $8,000, and Parent Co. records a profit of $2,000 on the sale.

However, if Sub Co. hasn’t sold that inventory by year-end, the group still owns it. And because the sale happened within the group, that $2,000 profit isn’t actually realised yet. This is why we have to eliminate intra-group profits when preparing consolidated financial statements.

In simple terms: if the group still holds the inventory, any profit made within the group is still floating around, meaning it hasn’t been earned from an external customer yet.

Key adjustments we make:

• Eliminate intra-group sales and purchases in the consolidated statement.
• Remove any unrealised profit sitting in closing inventory.

This might sound tedious, but the point is to ensure that we’re not double-counting profits and inflating the group’s financial performance.

Practical example

Let’s break this down further with an example.

Imagine Parent Co. sells inventory to Sub Co. for $10,000. The cost of this inventory was $8,000, meaning Parent Co. records a $2,000 profit. By the end of the year, Sub Co. still has half of that inventory in stock—so $5,000 worth of purchases remain unsold.

The group-level adjustment would involve:

• Eliminating the intra-group sale and purchase: Remove the $10,000 revenue and corresponding purchase entry on the Sub Co. books.
• Adjusting for the unrealised profit: Since half of the inventory is still on hand, we need to remove half of the $10,000 profit, which is $5,000. This reduces the inventory value on the consolidated balance sheet.

This process ensures that the financial statements reflect only the profits that have been realised from external parties.

Why it matters

You might be wondering why this matters? Improper treatment of intra-group transactions can distort financial statements and mislead stakeholders.

If intra-group sales aren’t eliminated, revenue and profits could be artificially inflated, making the company appear more profitable than it actually is. This is a serious issue when it comes to financial reporting integrity and can raise concerns among auditors and investors.

For example, regulators and analysts often scrutinise whether companies are properly eliminating intra-group transactions. If they aren’t, it can lead to financial restatements, reputational damage, and even legal consequences.

Common student questions

Before we end, let’s address some common questions students have:

“If the sale actually happened, why do we eliminate it?”
Because we’re looking at the group as a whole. The group hasn’t earned revenue until it sells to an external customer.

“What happens if the inventory is eventually sold?”
Once Sub Co. sells the inventory to an external customer, the unrealised profit from earlier becomes realised and can be recognised in the next period.

“Do intra-group services follow the same rules?”
Yes and no. Services don’t involve inventory, but intra-group charges for management fees or interest on loans may still need to be adjusted if they don’t reflect the fair value.

Show notes simplified

In this episode, MJ the tutor continues on with a series on the F pillar. In particular, today’s episode focuses on intra-group trading and transactions. She’ll explore some of the accounting challenges faced when recording intra-group and why properly recording these transactions are fundamental to understanding how group accounts work.