Field notes · 11 May 2026
When unrealised profit in inventory quietly inflates group margin
How unfinished goods sold between subsidiaries leave profit in ending inventory — and why consolidation teams miss it under time pressure.
Intercompany sales of inventory are ordinary. The consolidation problem appears when goods remain unsold to external customers at the reporting date. Profit recorded by the selling subsidiary still sits in the buying subsidiary’s inventory — and in group margin until it is eliminated.
Why it slips
Close calendars reward speed. Elimination teams often clear reciprocal receivables and payables first, then rush inventory profit using a rough percentage. If the selling margin varies by product line, a single blended rate understates or overstates the elimination.
A practical check
Ask for the intercompany sales listing by SKU or product family for the final quarter, match it to ending inventory at the buyer, and apply the actual selling margin — not last year’s average. When volumes are large, sample the highest-margin lines first.
Taiwan groups with offshore plants
Goods moving from a Taiwan parent to an offshore subsidiary (or the reverse) also carry FX. Eliminate profit in the functional currency of the inventory holder, then translate. Mixing the order creates CTA noise that looks like an FX error but started as an inventory profit miss.