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Answer extract: In addition, the cars may be supplied including a profit margin or mark up, in which case a provision for unrealised profit should be recognised in the Group financial statements. If this is not accounted for, Group inventory will be overstated, and operating profit will be overstated.
We remove provision for unrealised profit from the inventory and cost of sales, why does the answer say to recognise?
Provision for unrealised profit (“PURP”) is a term that predates IAS 37 – it is not a provision in the IFRS meaning of the word (i.e. a liability)
PURP refers to the consolidation adjustment which is to reduce inventory by the amount that represents unrealised profit. This has the effect of reducing inventory in SoFP and cost of sales in SoPL (and hence reduces profit).
“a provision for unrealised profit should be recognised” is saying that this adjustment must be made (!)
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