Intra-Entity Fixed-Asset Transfers — Eliminating Gains and Adjusting Depreciation

When fixed assets are transferred between a parent and subsidiary (or between subsidiaries under common control), any gain must be eliminated in the consolidated financial statements.

Depreciation must also be adjusted to reflect the asset’s original carrying amount, preserving the group’s overall historical cost and depreciation schedule.

1. Why elimination is required

Intra-group transfers do not create real economic gains for the consolidated entity. Recognizing profit from selling a fixed asset internally would artificially inflate income and asset values.

Therefore:

• Gains or losses on transfer are deferred.

• Depreciation is adjusted to match the original cost to the group.

These adjustments continue until the asset is sold to a third party or fully depreciated.

2. Example of intra-entity fixed-asset sale

Scenario:

Subsidiary A sells equipment to Parent Company for $100,000

Original book value = $70,000Remaining useful life = 5 years

Gain on sale = $30,000

Journal entry on Subsidiary A’s books (seller):

• debit Cash .............................................................................. $100,000

• credit Equipment .................................................................... $70,000

• credit Gain on Sale of Equipment ........................................ $30,000

Parent (buyer) records equipment at purchase price and depreciates over 5 years

3. Consolidation entries to eliminate gain and adjust depreciation

Step 1: Eliminate unrealized gain

• debit Gain on Sale of Equipment ........................................ $30,000

• credit Equipment .................................................................... $30,000

This reverses the profit recorded by the seller.

Step 2: Adjust depreciation

Depreciation based on internal transfer price: $100,000 ÷ 5 = $20,000/yearDepreciation based on historical cost: $70,000 ÷ 5 = $14,000/yearExcess depreciation = $6,000

• debit Equipment Depreciation Expense ............................. $6,000

• credit Equipment .................................................................... $6,000

This ensures depreciation in consolidation reflects original cost.

4. Carrying amount reconciliation over time

Year	Carrying Value per Buyer	Depreciation per Buyer	Adjustments in Consolidation	Consolidated Carrying Amount
0 (after transfer)	$100,000	—	–$30,000 gain eliminated	$70,000
1	$80,000	$20,000	–$6,000 depreciation reversed	$74,000
2	$60,000	$20,000	–$6,000	$68,000
…	…	…	…	…

The unrealized gain is reversed over time through depreciation adjustments.

5. Intra-group sale between subsidiaries

If the asset is transferred from one subsidiary to another, and both are consolidated under a common parent:

• Eliminate gain in full.

• Adjust depreciation on the consolidated level, not in either subsidiary’s stand-alone accounts.

Attribution of the reversal (in equity or income) depends on the ownership structure and direction of transaction (upstream or downstream).

6. Tax and deferred tax effects

If the internal sale triggers taxable gain under local tax law, a temporary difference arises:

Component	Effect
Book gain eliminated	No income in consolidation
Taxable gain remains	Creates deferred tax liability (DTL)

The DTL is reversed over the asset’s remaining life as depreciation is recognized.

Example entry:

• debit Deferred Tax Expense ......................................... X

• credit Deferred Tax Liability .......................................... X

7. Disclosure and audit attention

Companies must disclose material intra-entity asset transfers, especially if they materially affect:

• Consolidated income

• Depreciation expense

• Fixed asset values

Auditors focus on:

• Proper elimination of intra-group gains

• Accurate tracking of adjusted depreciation

• Deferred tax recognition and reversals

Key take-aways

• Gains on intra-entity fixed-asset transfers must be eliminated in consolidation.

• Depreciation must be recalculated to reflect the asset’s original cost to the group.

• These adjustments continue until the asset is sold externally or fully depreciated.

• Deferred tax liabilities may arise when intra-group gains are taxable but eliminated for book purposes.

• Accurate consolidation entries and clear documentation ensure financial statement integrity.