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Unrealised profit adjustments
Where inter-company trading takes place between group companies and the
inventory is still held by the group at the year- end, an adjustment is made in the
group accounts because the profit has not been realised outside of the group.
However, tax is charged on the profits of the individual companies, not on the
group as a whole. The profit on intra-group sales will therefore be subjected to tax,
and this will create a temporary difference.
The issue to resolve is whose tax rate should be used when providing for the
deferred tax on this temporary difference – the seller’s or the buyer’s?if the buyer’s tax rate is higher than seller’s, the seller’s tax on the group’s point of view’s unrealized profit will be over reversed, it seems unreasonable?
That’s the rule! They had to make a decision one way or the other. I agree it is counter-intuitive.
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