How does eliminating unrealized profit differ for upstream versus downstream transactions, and what's the NCI impact?
An advanced Group Accounting question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
Unrealized profit arises when one group entity sells to another at a margin and the goods/assets are still held within the group at period end — that intragroup profit isn't realized to third parties, so it must be eliminated until the asset is sold externally (or consumed/depreciated). The direction determines who bears the elimination. Downstream (parent sells to subsidiary): the profit sits with the parent, so 100% of the unrealized profit is eliminated against the parent's interest — NCI is unaffected. Upstream (subsidiary sells to parent): the profit sits in the subsidiary, so the elimination is shared between the parent and NCI in proportion to ownership. Example: a partly-owned (80/20) sub books €40k unrealized profit on inventory still held — you eliminate the full €40k from group profit, but the reduction is split €32k to the parent and €8k to NCI (and you recognize the related deferred tax). The trap is charging upstream eliminations entirely to the parent and forgetting the NCI share (and the deferred-tax effect).
WHAT INTERVIEWERS LISTEN FOR
- ✓Eliminate intragroup profit on assets still held within the group until realized externally
- ✓Downstream (parent→sub): 100% to parent, NCI unaffected
- ✓Upstream (sub→parent): split between parent and NCI by ownership %
- ✓Recognize related deferred tax; reverse as the asset is sold/depreciated
COMMON MISTAKES
- ✗Charging upstream eliminations entirely to the parent
- ✗Forgetting the NCI share / deferred tax
- ✗Not reversing as the profit is later realized
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