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Why is it necessary to make adjustments for intragroup transactions?

Why is it necessary to make adjustments for intragroup transactions?

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Answer #1

The consolidated financial statements (CFS) are the statements of the group, an economic entity consisting of a parent and its subsidiaries.

They there fore can only contain profits, A and L that relate to parties external to the group.

Adjustments must then be made for intragroup transactions as these are internal to the entity, and do not reflect the effects of of transactions with external parties.

This is also consistent with the entity concept of consolidation, which defines the group as the net assets of the parents and the net assets of the subsidiary. Transactions between these parties must be adjusted in full as both parties are within the economic entity.

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