FAR Consolidations · Updated November 2026
Intercompany Inventory Profit: Why Must It Be Eliminated in Consolidation?
From the consolidated entity's perspective, no profit exists until inventory leaves the group.
Separate books
A parent and subsidiary can record a sale and purchase in their own books.
Unrealized profit
If inventory remains inside the group, the seller's profit is not earned from an outsider.
Elimination
Consolidation removes the intercompany sale and profit embedded in ending inventory.
Exam strategy
Track the unsold inventory and the intercompany profit rate.
The takeaway
Intercompany inventory profit is eliminated until an external sale occurs.
Related Summit resources
FAQ
Is separate-company profit always consolidated profit?
No.
What creates unrealized profit?
Inventory still held inside the group.
When is it realized?
When sold outside the group.