Unrealised Profits

There are no unrealised profits at acquisition. Unrealised profit is when a company within a group sells an item at a profit to another company within the group, but the second company has not sold the item to a customer outside the group.

Before acquisition, the companies are not in a group together so there is no unrealised profit. If they were selling items to each other before acquisition, these were realised profits and will be reflected in the net assets of the company.

Fair value adjustments are different because they already exist at the time of acquisition. They are the difference between the book value of a company’s assets and their true value on the open market.

@suremail13 said:
Thank you!

Just a reaffirmation of what you said..
Any sale before acquisition between the group that is sitting as Accounts Receivable/payable would get wiped off as well on consolidation, right?

No, the sale was made so the profit was made, regardless of whether the money was actually paid yet. The receivable/payable balances will be contra’d in the consolidated accounts, but the revenue/profit will remain in the seller’s individual accounts.

Of course, the subsidiary P&L is only included in the consolidated accounts from the date of acquisition onwards, so if the subsidiary was the seller, the the revenue would not appear in the consolidated accounts but if the parent was the seller then it would.

Can you please help understand how to treat unrealised profit. Does it go in the Net assets workings and retained earnings ?
Does it only apply when the parent sells to the sub or when the sub sells to the parent or both.

Please help … I am finding it a bit confusing,many thanks .