Intra-Entity Land & Intangibles — Indefinite Deferral of Unrealized Profit

When land or indefinite-lived intangibles are sold within a group, any unrealized gain must be eliminated and cannot be reversed through depreciation.

Since these assets are not amortized, the profit remains deferred in full on the consolidated books until the asset is sold to an external party.

1. Why land and indefinite-lived intangibles require indefinite deferral

Unlike equipment or amortizable intangibles, land and indefinite-lived intangibles do not decline in value through depreciation or amortization.

Therefore:

• There is no mechanism to reverse the intra-group gain over time.

• The unrealized profit is deferred in full until a third-party sale.

This prevents artificial inflation of consolidated income and asset values.

2. Example — Intra-group sale of land

Scenario:

Subsidiary A sells land to Parent for $500,000Original carrying amount = $300,000Recorded gain on sale = $200,000

Subsidiary’s entry:

• debit Cash ............................................................................. $500,000

• credit Land ............................................................................ $300,000

• credit Gain on Sale of Land .............................................. $200,000

Parent records land at $500,000

3. Consolidation adjustments

Eliminate the unrealized gain on land:

• debit Gain on Sale of Land ................................................ $200,000

• credit Land ................................................................................ $200,000

This reduces the land's carrying amount in consolidation to its historical cost.

No reversal occurs over time, unlike fixed assets. The gain is recognized in consolidated income only when the land is sold to an external buyer.

4. Indefinite-lived intangibles — same principle

Examples include:

• Trademarks (not amortized)

• Broadcasting licenses

• Renewable rights with indefinite renewal periods

When transferred intra-entity:

• Recognize no gain in consolidation

• Carry at the original historical cost until sold outside the group

Example:

Trademark internally sold for $1 millionOriginal book value = $600,000Unrealized gain = $400,000

Eliminate the gain in consolidation:

• debit Gain on Trademark Sale .............................. $400,000

• credit Trademark (Intangible Asset) ................... $400,000

The adjusted value remains until disposal to an unrelated party.

5. Consolidated carrying value reconciliation

Year	Internal Transfer Price	Original Carrying Amount	Deferred Gain	Consolidated Value
T 0	$500,000	$300,000	$200,000	$300,000
T + n	(No external sale)	(Unchanged)	$200,000	$300,000
Disposal to third party	$600,000	—	Gain realized	Full gain recognized

Until sale, the carrying amount remains at the original book value, and no amortization or reversal occurs.

6. Tax effects and deferred tax liabilities

If the internal sale is taxable, a deferred tax liability (DTL) must be recognized for the temporary difference between book and tax bases.

Book Treatment	Tax Treatment	Deferred Impact
Gain eliminated in books	Taxable gain recognized	DTL created
No book depreciation	No tax depreciation	DTL remains until sale

DTL reversal occurs only when the asset is sold to an external party.

7. Audit considerations and disclosure

Auditors will verify:

• Elimination of unrealized gains on intra-group transfers

• Proper classification and tracking of indefinite-lived assets

• Accurate DTL recognition where tax gain is triggered

• Documentation of potential future recognition (disclosures)

Disclosure example:

“As of year-end, $400,000 of unrealized intra-group profit related to land and trademarks was deferred. These assets are carried at original historical cost in the consolidated financial statements. The associated deferred tax liability totals $96,000.”

Key take-aways

• Intra-entity gains on land and indefinite-lived intangibles are fully deferred in consolidation with no periodic reversal.

• The gain is only recognized when the asset is sold externally.

• Deferred tax liabilities may arise if the internal transfer was taxable.

• Clear tracking and transparent disclosures are critical for audit readiness and financial statement accuracy.