Strategic Business Reporting (International) · Associates and joint arrangements

Unrealised Profits and Impairment of Associates in ACCA SBR

Updated 11 October 2026 · Fact-checked

Unrealised profit arises when the group or an associate sells goods to the other and some stock is still held at the year end. You remove the investor's share of that profit from the group results. You then test the investment in the associate for impairment under IAS 28 and IAS 36 if there are indicators.

Understand Unrealised Profits and Impairment of Associates

An associate is accounted for using the equity method. The group does not combine the associate's assets and liabilities line by line. It shows one investment line and one line for its share of profit. Because of this, when the group trades with an associate, the investor's share of any profit still in inventory is unrealised. The group has effectively sold to itself to the extent of its interest in the associate.

Suppose the group sells goods to an associate at a profit and the associate still holds them at the year end. The group has only partly sold to an outsider. IAS 28 says you eliminate the profit to the extent of the investor's interest in the associate. You do not eliminate 100%, and you do not treat the associate as a subsidiary.

The direction of the sale decides where the adjustment goes. Downstream means the parent or a subsidiary sells to the associate. Upstream means the associate sells to the parent or a subsidiary. In both cases the unrealised profit is multiplied by the group's percentage holding in the associate.

IAS 28 requires the investor's share of the unrealised profit to be eliminated. It does not fix the line where the debit goes. The usual textbook convention is this. For downstream sales, the seller is the parent or a subsidiary, so the group share of the unrealised profit is debited to group cost of sales, and the credit reduces the investment in associate. For upstream sales, the associate is the seller, so the group share is deducted from the share of the associate's profit, and the credit again reduces the investment in associate. Other presentations are possible, for example showing a downstream adjustment within the share of the associate's profit. Follow the question's instructions, and state the presentation you use.

Impairment is a separate step. IAS 28 says the investment is tested under IAS 36 only when there are indicators of impairment. Goodwill inside the carrying amount is not tested separately. The whole investment is tested as one asset. Compare its carrying amount with its recoverable amount, which is the higher of fair value less costs of disposal and value in use. Any loss is charged to profit or loss and reduces the investment. IAS 28 says the loss is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment. So the IAS 36 ban on reversing goodwill impairment is not engaged, and any reversal is recognised under IAS 36 to the extent that the recoverable amount increases.

Key rules to remember

Unrealised profit in closing inventory: Unrealised profit = Inventory still held × profit margin on the transfer price; Use margin on selling price. If given as a mark-up on cost, convert: mark-up ÷ (100% + mark-up).
Investor's share eliminated: Group adjustment = Unrealised profit × group % in associate; Applies to both upstream and downstream. Only the group's share is removed.
Downstream adjustment: Dr Group cost of sales; Cr Investment in associate; Seller is the parent or subsidiary, so its profit is reduced by the group share. IAS 28 requires the elimination of the investor's share. Debiting cost of sales is the usual textbook convention, and other presentations are possible.
Upstream adjustment: Dr Share of profit of associate; Cr Investment in associate; Seller is the associate, so the share of associate profit is reduced.
Carrying amount of associate at year end: Cost + share of post-acquisition profit − dividends received − group share of unrealised profit still held at year end − impairment loss; Only the closing unrealised profit is deducted. Profit from earlier years that has been realised by sale is no longer deducted. Add or deduct share of OCI items too if the question gives them.
Recoverable amount: Higher of (fair value less costs of disposal) and (value in use); Impairment loss = carrying amount − recoverable amount, if carrying amount is higher.

How to solve Unrealised Profits and Impairment of Associates questions

Use this order for any question on unrealised profit or impairment of an associate.

1Confirm the investee is an associate (significant influence, usually 20% to 50% of votes) and note the group holding percentage.
2Identify the direction of each transaction: downstream (group sells) or upstream (associate sells).
3Find the goods still held at the year end and calculate the profit in them using the margin on the transfer price.
4Multiply that profit by the group percentage. This is the amount to eliminate.
5Post the entry: downstream reduces group profit of the seller; upstream reduces share of associate's profit. Both reduce the investment in associate.
6Calculate the carrying amount of the investment after the share of profit, dividends and unrealised profit.
7Check for impairment indicators. If present, compare the carrying amount to recoverable amount and record any loss in profit or loss.
8Write a short note that explains the treatment, as SBR awards marks for explanation as well as numbers.

Quickest way: Four-line shortcut for the associate working

When to use it: Use when time is short and the question asks only for the investment in associate or share of profit.

Write the associate's profit after tax and multiply it by the group percentage to get the share of profit.
For upstream sales, multiply the unrealised profit by the group percentage. Deduct the group share of closing unrealised profit from the share of profit, and add back the group share of opening unrealised profit that was realised in the year. This gives the same result as adjusting the associate's profit first and then applying the percentage.
For downstream sales, do the same with the group share: deduct the closing unrealised profit and add back the opening unrealised profit realised in the year. The debit and credit go to group cost of sales (by convention) and the investment.
Roll forward the investment: opening carrying amount + share of profit − dividends − impairment. The share of profit here is already after the upstream adjustments, so closing upstream unrealised profit is deducted and opening upstream unrealised profit realised is added back. Show the downstream adjustments separately in the roll-forward: + opening unrealised profit realised (group share, downstream) − closing unrealised profit (group share, downstream). Do not include upstream items a second time. Done.

Common mistakes in Unrealised Profits and Impairment of Associates

Eliminating 100% of the unrealised profit instead of the group share.
Students copy the subsidiary rule where full elimination applies.
Fix: Associates use the equity method. Always multiply the unrealised profit by the group percentage.
Putting a downstream adjustment through the associate's profit when the question follows the usual convention.
The wrong entity is treated as the seller.
Fix: Ask who made the sale. By the usual convention, if the group sold, reduce the group's own profit (cost of sales); if the associate sold, reduce the share of associate profit. Follow any different presentation the question requires.
Using mark-up as if it were margin.
The question gives a mark-up on cost and the student applies it to selling price.
Fix: Convert mark-up to margin first. A 25% mark-up is a 20% margin (25 ÷ 125).
Testing goodwill on the associate separately for impairment.
The rule for subsidiaries is applied by habit.
Fix: IAS 28 tests the whole carrying amount of the investment as one asset. Goodwill is not separately recognised.
Forgetting to deduct unrealised profit before testing impairment.
The roll-forward is rushed.
Fix: Build the carrying amount in full, including the unrealised profit adjustment, then compare with recoverable amount.
Removing the unrealised profit again in the following year, or ignoring the opening unrealised profit.
Students forget that profit deducted last year is realised when the goods are sold on.
Fix: Opening unrealised profit was deducted in earlier years and sits in opening reserves. If the goods are sold on in the year, add back the group share of the opening unrealised profit in the current year. Deduct only the group share of the closing unrealised profit.

Worked examples

Example 1

Alpha owns 30% of Beta, an associate. During the year Alpha sold goods to Beta for ₹12,00,000, earning a 25% margin on selling price. At the year end Beta still held half of these goods. Beta's profit after tax is ₹50,00,000. Calculate the share of profit of the associate to include in group profit, the downstream adjustment, and the net effect on group profit.

Show the solution

Direction: Alpha sold to Beta, so the transaction is downstream.
Goods still held: ₹12,00,000 × 50% = ₹6,00,000.
Profit in those goods: ₹6,00,000 × 25% = ₹1,50,000.
Group share: ₹1,50,000 × 30% = ₹45,000.
Share of Beta's profit: ₹50,00,000 × 30% = ₹15,00,000.
Entry: Dr Group cost of sales ₹45,000; Cr Investment in associate ₹45,000.
Net effect on group profit: share of profit ₹15,00,000 − downstream adjustment ₹45,000 = ₹14,55,000.

Answer: Share of profit of associate is ₹15,00,000. Unrealised profit eliminated is ₹45,000, charged against the group's profit (downstream, through cost of sales) and deducted from the investment. Net effect on group profit is ₹15,00,000 − ₹45,000 = ₹14,55,000.

Exam tips

Write down the direction (upstream or downstream) next to each transaction before calculating. It protects marks if the numbers go wrong.
Show the margin working clearly. Examiners give marks for the method even if the later figure is wrong.
In a written part, explain why only the group share is eliminated: the associate is not controlled, so the equity method applies.
Impairment questions often hide indicators in the narrative, such as losing a customer or a regulatory change. Name the indicator before testing.
Link impairment to professional skills: comment briefly on whether management's value in use assumptions look optimistic.

Practice questions from Associates and joint arrangements

Unrealised Profits and Impairment of Associates in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Unrealised Profits and Impairment of Associates: frequently asked questions

What is the difference between upstream and downstream transactions with an associate?

Downstream means the parent or a subsidiary sells to the associate. Upstream means the associate sells to the parent or a subsidiary. The direction decides, under the usual convention, whether you reduce the group's own profit or the share of the associate's profit.

Do I eliminate all the unrealised profit on sales to an associate?

No. IAS 28 requires you to eliminate only the investor's share, so you multiply the unrealised profit by the group percentage. Full elimination applies to subsidiaries, not associates.

When do I test an investment in an associate for impairment?

Only when there are indicators of impairment, as IAS 28 requires. If there are, you test the whole carrying amount as one asset under IAS 36, not goodwill separately.

Can an impairment loss on an associate be reversed?

Yes, if the recoverable amount later increases. IAS 28 says the impairment loss is not allocated to any asset, including goodwill, within the investment. So the goodwill reversal ban in IAS 36 is not engaged. The reversal is recognised under IAS 36 to the extent that recoverable amount rises.