Some Challenges in the Consolidation of Unrealized Intra-Group Profits and Losses

Abstract

Procedures for eliminating internal results in practice may vary due to the different nature of the relationship between related parties, but also due to the vagueness of the accounting regulation, which opens up space for alternative procedures in practice. The ways of eliminating internal profits and losses differ primarily depending on whether full consolidation of financial statements or one-line consolidation, followed by the application of the equity method, is performed. At the same time, with both mentioned consolidation procedures, questions are raised regarding whether downstream and upstream transactions should have the same treatment, that is, whether the total internal result should be eliminated or only its part that is proportional to the ownership share. The aim of this paper consists in analyzing specific issues of eliminating internal results, while considering the current state and the possibility of improving accounting regulations in that field.