What is the effect of unrealised profit in intra-group non-current asset transfers?

Unrealised profit in intra-group non-current asset transfers arises when one entity within a group sells an asset to another entity in the same group at a profit, but that profit is not realised from the perspective of the group as a whole. When preparing consolidated financial statements, the unrealised profit from these transactions is not recognised as income because it does not reflect a genuine economic benefit to the group until the asset is sold to an external party.

The correct approach is to deduct the unrealised profit from retained earnings in the consolidated financial statements. This adjustment ensures that the profit does not inflate the group's financial performance, as it would not have been realised in terms of cash flow or actual profit until an external sale occurs. By reducing retained earnings, the consolidated financial statements present a more accurate picture of the group's financial position, eliminating the effects of internal dealings that do not represent revenue-generating activities.

This treatment is essential to avoid double-counting profits that are only on paper until the asset is sold to an outside entity. Consolidated financial statements aim to reflect the economic reality of the group as if it were a single entity, which means that intra-group profits must be excluded from the reported earnings until they become realised.