An intercompany balance should not disappear from a consolidation worksheet merely because somebody typed an elimination journal. First establish what each entity recorded and why the two records differ. For ACCA learners in Indonesia, a fictional two-company trading example makes that sequence tangible.
Both entities in this exercise are assumed to fall within a group that requires consolidation under the stated IFRS learning assumptions. The example does not determine the reporting framework applicable to an Indonesian company, establish control from geography, or address tax and transfer-pricing requirements.
Identify the parties and the reporting date
Company J sells goods to Company S. At the same reporting date, J shows an intercompany receivable of IDR 150 million, while S shows an intercompany payable of IDR 130 million. The consolidation team identifies a payment of IDR 20 million recorded by S immediately before period-end but not yet recorded as received by J.
The difference is not explained by labelling one entity “wrong”. Check the transfer evidence, bank records and applicable cut-off before deciding on the appropriate cash-in-transit adjustment. The learning point is to reconcile the reciprocal records before eliminating an agreed group balance.
Keep the matching schedule explicit
Use columns for seller, buyer, invoice reference, invoice date, original amount, payment reference, amount settled and remaining balance. Ask both entities to confirm the same cut-off date. Comparing one company’s month-end balance with the other’s next-day report can generate an artificial mismatch.
If an invoice is absent from the buyer’s ledger, investigate whether the goods were received, whether the invoice was disputed and which period the transaction belongs to. Do not assume that every difference is cash in transit just because the first example used that explanation.
Then consider profit remaining inside the group
In a separate transaction, J transfers inventory costing IDR 80 million to S for IDR 100 million. Assume half the goods remain unsold outside the group at the reporting date. The total intragroup profit is IDR 20 million; the part included in the remaining inventory is IDR 10 million in this simplified example.
Under the stated assumptions, the consolidation adjustment removes that IDR 10 million unrealised profit from the group inventory carrying amount and group profit. It is distinct from eliminating the reciprocal receivable and payable. A balance can reconcile perfectly while an inventory-profit adjustment is still required.
IFRS 10’s consolidation procedures require intragroup balances and transactions to be eliminated, including relevant profit recognised in assets. The illustration leaves out non-controlling interests, tax effects and other complications so that the two adjustments can be understood separately.
Explain the evidence each adjustment needs
The balance elimination relies on a reconciled counterparty position. The inventory adjustment needs the original cost, transfer price and quantity still held within the group. A reviewer who receives only the combined journal cannot easily tell whether either calculation is supported.
Label assumptions and attach a short explanation to each worksheet. If the buyer sold all the goods to external customers before year-end, revisit the inventory-profit calculation rather than carrying forward last month’s percentage automatically.
A useful practice variation
Change the unsold proportion from one-half to one-quarter and calculate the revised unrealised profit. Next, introduce a disputed invoice unrelated to the payment in transit and write the questions you would send to the two finance teams. The exercise is complete when you can explain why reconciliation, elimination and unrealised profit are connected tasks with different evidence requirements.
Sources and further study
- IFRS Foundation: IFRS 10 Consolidated Financial Statements
- IFRS 10: consolidation procedures, paragraph B86
Explore ASA ACCA courses for your next paper, and check the course page for its current teaching language, syllabus coverage and access terms.