Consolidation Adjustments Explained: Common Entries, Example, and Why They Matter

Common types of consolidation adjustments

Consolidation adjustments usually include:

1. Intercompany eliminations
   • Eliminating intercompany sales and purchases so group revenue isn’t inflated
   • Eliminating intercompany receivables/payables so assets and liabilities aren’t overstated
   • Eliminating intercompany loans and interest income/expense
2. Unrealised profit (UP) eliminations
   • Removing profit on internal sales where the related inventory (or asset) hasn’t yet been sold externally
   • Adjusting the carrying value of inventory or fixed assets to remove the “internal margin”
3. Acquisition accounting entries
   • Recognising goodwill and other acquisition-related balances
   • Recording fair value adjustments on acquired assets and liabilities
   • Recognising and reporting non-controlling interest (NCI) where ownership is less than 100%
4. Accounting policy alignment
   • Standardising treatments across entities (e.g., depreciation policies, classification rules) so group reporting is consistent
5. Reclassifications
   • Moving balances into the group’s preferred reporting structure (e.g., cost of sales vs operating expenses, current vs non-current)

Example of internal sale and unrealised profit

Subsidiary A sells inventory to Subsidiary B for £120,000. A’s cost is £100,000, so A records £20,000 profit. At month-end, B still holds 50% of the inventory.

At group level:

• Eliminate the internal sale so the group isn’t “selling to itself”
• Eliminate the unrealised profit still embedded in closing inventory

Unrealised profit remaining = £20,000 × 50% = £10,000

A typical consolidation adjustment will:

• Reduce group profit by £10,000
• Reduce group inventory by £10,000 (so inventory is not overstated by internal margin)

This ensures the group only recognises profit when the inventory is sold to an external customer.

Why it matters

Without consolidation adjustments, group financials can be materially misleading:

• Revenue and expenses can be inflated by internal trading
• Assets and liabilities can be overstated by intercompany balances
• Profit can be overstated by unrealised internal gains
• KPIs can become inconsistent if policies differ by entity
• Close and audit cycles become slower due to weak support and late corrections

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1. Do consolidation adjustments change each entity’s statutory accounts?
   Usually no. They’re posted in a consolidation layer so entity accounts remain intact while group reporting is corrected.
2. Are consolidation adjustments the same as eliminations?
   Eliminations are a type of consolidation adjustment, but adjustments can also include acquisition entries, policy alignment, and reclassifications.
3. What causes consolidation adjustment errors most often?
   Intercompany mismatches (timing/currency/counterparty), weak cut-off, and missing support for unrealised profit calculations.

Find out more about consolidation with AccountsIQ.