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Hi Mike,
I have read the chapter for associate but I can’t understand the logic behind the transaction between company and associate. If there is unrealised profit for an associate, they account DR COGS / Cr investment associate ( P sell to A) and Dr RE / Cr group Inventory ( A sell to P). Can you explain the logic why we should do that?
Thank you very much.
It all comes down to the fact that we don’t control the associate
But, in the interests of prudence, the Interpretations Committee decided that it was appropriate to eliminate the parent’s share (JUST the parent’s share) of any unrealised profits arising from the group’s transactions with the associate
The adjustment that I make is ALWAYS in the associate’s records and that adjustment is to reduce the retained earnings in the associate by the FULL pup
Then, when we prepare the consolidated retained earnings in working W3, we take the group’s share of the associate’s (now adjusted) profit after tax into the consolidated retained earnings
Working W5A, Investment in Associate, is calculated as Cost of investment + group’s share of associate’s (now adjusted) post acquisition retained earnings
In summary:
Dr Consolidated Retained Earnings
Cr Investment in AssociateIs that OK for you?
Because Investment in Associate (working W5A) is calculated as ….
Cost of investment +
Group’s share of Associate’s post-acquisition retained earnings –
Any impairments
It’s that second line that tells the story
Because we’re taking the entire pup off the Associate’s profits, that reduces the retained earnings and then, when we take our share of those reduced retained earnings, that eliminates automatically our share of the unrealised profits that were recognised by the associate and that are included within the group’s inventory
How’s that?
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