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Why PUP is subtracted from cost of investment of an associate when the sales of goods is taking place from a parent to an associate and its the parent that is making profit and not the associate and on the other hand it is also deducted from retained earnings of parent ? I am very confused between the two. Sir please elaborate on this !
Because the treatment of associates (equity accounting) is different from the treatment of subsidiaries (acquisition accounting)
unlike with a subsidiary where the entire pup is deducted in the records of the company that has recognised the profit, with an associate, because we are not in control of the associate’s activities, the treatment is to eliminate just the Group’s share of the pup.
Now, there are two distinct ways of achieving this objective.
We can either calculate the group’s share and deduct that figure in working W3 in the consolidation and credit the figure for investment in associate in working W5A (this is the method adopted by Kaplan and BPP), or
We can do it in what I consider to be an easier way and that is to deduct the entire pup in the records of the associate (it doesn’t matter whether it’s the associate that has recognised the profit or the parent / subsidiary)
That way we eliminate the full pup when preparing working W3 in the associate’s column and then we take just the group’s share of those adjusted associate post acquisition profits. in that way we have eliminated just the group’s share of the pup which is what we were trying to achieve.
is that any clearer?
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