What must be eliminated on consolidation when goods transferred at a profit are still held at the year-end?

When goods are transferred between a parent company and its subsidiary at a profit, and those goods remain in the ending inventory of the group at the year-end, the unrealised profit needs to be eliminated on consolidation. This is necessary because, from the group's perspective, this profit has not been realized through a sale to an external entity.

The concept of unrealised profit pertains to the difference between the cost of the goods to the seller and the selling price to the buyer within the group. Since the goods are still held in inventory, the profit is not considered earned from an accounting perspective until the goods are sold to an outside party. Thus, to present an accurate financial picture of the consolidated financial statements, this unrealised profit must be removed to avoid inflating the profits of the group.

Eliminating the unrealised profit does not impact other components like goodwill, depreciation, or net assets at this particular consolidation stage. Goodwill reflects past acquisition values, depreciation pertains to asset usage over time, and net assets represent the total value of assets minus liabilities, none of which directly address the issue of profits not yet realised through external transactions. Therefore, the requirement to eliminate unrealised profit is essential for accurate financial reporting and adherence to the accounting principles of consolidation.