Financial Reporting · Ind AS 28 Investments in Associates and Joint Ventures

Unrealised Profits and Transactions with Associates (Ind AS 28)

Updated 5 October 2026 · Fact-checked

Under Ind AS 28, profit or loss on transactions between you and your associate or joint venture is recognised only to the extent of other investors' interests. Eliminate your percentage share of the unrealised profit still sitting in unsold inventory or assets. Deduct it from your share of the associate's profit and from the investment's carrying amount.

Understand Unrealised Profits and Transactions with Associates

When an investor and its associate trade with each other, the profit is not fully earned from the group's point of view until the goods or assets are sold outside. The equity method treats the associate as an extension of the investor. So you cannot count profit you made by selling to yourself.

But you do not control the associate. Other investors own part of it. Their share of the deal is a genuine transaction with outsiders. That is why you eliminate only your share of the unrealised profit, not all of it.

There are two directions. In a downstream transaction, the investor (or its subsidiary) sells to the associate or JV. In an upstream transaction, the associate or JV sells to the investor (or its subsidiary). The elimination percentage is the same: your holding percentage. The difference is where the unrealised profit sits. Upstream, it is inside the associate's reported profit, so that profit is overstated and you cut your share of it. Downstream, it is in the investor's own profit, not in the associate's reported profit. The associate's profit is not overstated, but you still deduct your share of the unrealised profit when you apply the equity method.

The unrealised profit becomes realised when the buyer sells the goods outside the group, or uses the asset up (for example, through depreciation). You then add the eliminated amount back in that period.

A similar idea applies when you contribute a non-monetary asset (such as land or a plant) to an associate or JV in exchange for an equity interest. If the transaction has commercial substance, you recognise gain or loss only to the extent of other investors' interests. If the contribution lacks commercial substance, you recognise no gain or loss. Unrealised losses are different. If the loss shows an impairment or a fall in net realisable value of the asset transferred, you recognise it in full.

Key rules to remember

Unrealised profit in closing stock: Unrealised profit = Total profit on the transaction × % of goods still unsold at year end; Work out the profit element first, using the selling price less the seller's cost. Then apply the unsold fraction.
Elimination of investor's share: Amount eliminated = Unrealised profit × Investor's holding %; The same % applies to upstream and downstream. Do not eliminate 100% for an associate or JV.
Adjusted share of associate's profit (upstream): Share of profit = (Associate's profit × Holding %) − (Unrealised profit × Holding %); The unrealised profit is already inside the associate's reported profit, so that profit is overstated and you cut your share of it.
Adjusted share of profit (downstream): Share of profit after elimination = (Associate's profit × Holding %) − (Unrealised profit × Holding %); The unrealised profit is in the investor's own profit, not in the associate's reported profit, so the associate's profit is not overstated. You still deduct your share of it in applying the equity method, against the share of profit and the investment.
Closing carrying amount of investment: Opening investment + Share of profit after elimination − Dividends received ± Other adjustments; The elimination reduces the investment balance. Reverse it in the year the goods are sold outside.
Unrealised loss (rule, not a formula): If the loss shows impairment or a fall in NRV of the asset transferred, recognise it in full. Otherwise, eliminate it to the extent of your interest.; Check the reason for the loss before you eliminate anything.
Contribution of non-monetary asset for equity interest (where the transaction has commercial substance): Gain recognised = Total gain × % held by other investors; Use this only where the transaction has commercial substance. If it lacks commercial substance, no gain or loss is recognised. The rest of the gain is unrealised and is eliminated against the investment.

How to solve Unrealised Profits and Transactions with Associates questions

Use this order for any question on transactions with an associate or JV. Keep the working neat, because marks are given for each step.

1Identify the direction. Who sold to whom? Investor to associate is downstream. Associate to investor is upstream.
2Find the profit on the transaction: selling price less the seller's cost. Check whether the question gives a profit margin (on cost or on sales) and convert it correctly.
3Find how much of the goods or asset is still held at the year end. Only the unsold part carries unrealised profit.
4Compute the unrealised profit: total profit × unsold fraction. For an asset, allow for depreciation already charged if the question says so.
5Multiply by the investor's holding percentage. This is the amount to eliminate.
6Compute your share of the associate's profit (profit × holding %). Subtract the elimination. Show the adjusted figure.
7Update the investment account: opening balance plus adjusted share of profit, less dividends. Carry any other given adjustments.
8In later years, add back the amount eliminated to the extent the goods are sold outside. State the conclusion in one line.

Quickest way: Three-line elimination shortcut

When to use it: Use it when the question gives a single sale of inventory and asks only for the adjusted share of profit or the closing investment balance.

Line 1: Unrealised profit = (Selling price − Cost) × unsold %.
Line 2: Elimination = Line 1 × holding %.
Line 3: Adjusted share of profit = (Associate's profit × holding %) − Line 2. Then closing investment = opening + Line 3 − dividends.

Common mistakes in Unrealised Profits and Transactions with Associates

Eliminating 100% of the unrealised profit instead of the investor's share.
Students copy the subsidiary consolidation method, where intragroup profit is eliminated in full.
Fix: For an associate or JV, multiply the unrealised profit by the holding percentage. Remember that the other investors are outsiders.
Treating all of the transaction's profit as unrealised.
Students forget that part of the goods has already been sold outside.
Fix: Apply the unsold fraction first. Only goods still in stock at the year end carry unrealised profit.
Confusing upstream and downstream and reducing the wrong figure.
The terms sound alike and students memorise them without the direction.
Fix: Write 'who sold to whom' beside the problem. Upstream means the associate is the seller. Downstream means the investor is the seller.
Forgetting to reverse the elimination in the next year when the goods are sold.
Students treat the elimination as a permanent reduction.
Fix: Unrealised profit is only deferred. Add it back in the period the buyer sells the goods outside or consumes the asset.
Eliminating an unrealised loss when it shows impairment.
Students apply the profit rule to losses without checking the reason for the loss.
Fix: If the loss reflects a fall in NRV or an impairment of the asset, recognise it in full. Otherwise eliminate your share.
Recognising the whole gain on contributing a non-monetary asset to an associate for equity.
The contribution looks like an ordinary sale to students.
Fix: Recognise the gain only to the extent of other investors' interests. Recognise nothing if the transaction lacks commercial substance.

Worked examples

Example 1

A Ltd holds 30% in B Ltd, an associate, which it has held since the start of the year. The investment at the start of the year was carried at ₹50,00,000. During the year B Ltd sold goods costing ₹6,00,000 to A Ltd for ₹8,00,000. At the year end, A Ltd still holds 25% of these goods. B Ltd's profit for the year is ₹20,00,000. No dividend was paid. Compute A Ltd's share of B Ltd's profit after elimination and the closing carrying amount of the investment.

Show the solution

Direction: B (associate) sold to A (investor). This is an upstream transaction.
Profit on the sale = ₹8,00,000 − ₹6,00,000 = ₹2,00,000.
Unrealised part = 25% of ₹2,00,000 = ₹50,000 (the goods still in A's stock).
Investor's share eliminated = 30% × ₹50,000 = ₹15,000.
Share of B's profit before adjustment = 30% × ₹20,00,000 = ₹6,00,000.
Share of profit after elimination = ₹6,00,000 − ₹15,000 = ₹5,85,000.
Closing investment = ₹50,00,000 + ₹5,85,000 = ₹55,85,000 (no dividends).

Answer: Share of profit recognised: ₹5,85,000. Closing carrying amount of the investment: ₹55,85,000. The ₹15,000 is added back in the year A Ltd sells those goods outside.

Example 2

P Ltd holds 40% in Q Ltd, an associate. During the year P Ltd sold goods costing ₹12,00,000 to Q Ltd for ₹15,00,000. Q Ltd sold 60% of these goods to outside parties during the year. Q Ltd's profit for the year is ₹10,00,000. Compute P Ltd's share of Q Ltd's profit after the elimination, and state the treatment in the following year if Q Ltd sells the remaining goods.

Show the solution

Direction: P (investor) sold to Q (associate). This is a downstream transaction. The unrealised profit is in P's own profit, not in Q's reported profit.
Profit on the sale = ₹15,00,000 − ₹12,00,000 = ₹3,00,000.
Goods unsold at the year end = 100% − 60% = 40%.
Unrealised profit = 40% × ₹3,00,000 = ₹1,20,000.
Investor's share eliminated = 40% × ₹1,20,000 = ₹48,000.
Share of Q's profit before adjustment = 40% × ₹10,00,000 = ₹4,00,000.
Share of profit after elimination = ₹4,00,000 − ₹48,000 = ₹3,52,000. The investment carrying amount is lower by ₹48,000 than it would have been.
Next year, when Q sells the remaining goods outside, the profit is realised. Add back ₹48,000 to P's share of profit for that year.

Answer: Share of Q's profit for the year: ₹3,52,000, after eliminating ₹48,000. In the next year, ₹48,000 is added back to P's share of profit when the goods are sold outside.

Exam tips

Write the direction (upstream or downstream) and the holding percentage at the top of the answer. Examiners look for them.
Show each number separately: total profit, unsold %, unrealised profit, investor's share. A wrong final figure still earns step marks.
Read the margin wording carefully. 'Profit of 25% on cost' and 'on selling price' give different profits.
Check for sales of assets other than inventory. In that case, allow for depreciation or use when you work out the part realised.
In MCQs on contribution of non-monetary assets, look for the words 'commercial substance'. Without it, no gain is recognised.

Practice questions from Ind AS 28 Investments in Associates and Joint Ventures

Unrealised Profits and Transactions with 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 Transactions with Associates: frequently asked questions

What is the difference between upstream and downstream transactions in Ind AS 28?

In a downstream transaction, the investor or its subsidiary sells to the associate or JV. The unrealised profit is in the investor's own profit. In an upstream transaction, the associate or JV sells to the investor or its subsidiary, so the unrealised profit is inside the associate's reported profit. In both cases you eliminate the investor's share.

Do I eliminate the full unrealised profit for an associate?

No. You eliminate only your percentage share of the unrealised profit. The rest relates to other investors, who are outside parties, so it is treated as realised.

Where do I adjust the eliminated profit in the equity method?

You reduce your share of the associate's profit and hence the carrying amount of the investment. In later years you add it back as the goods are sold outside or the asset is used up.

How is a contribution of a non-monetary asset to an associate treated?

When you contribute a non-monetary asset in exchange for an equity interest and the transaction has commercial substance, you recognise the gain or loss only to the extent of other investors' interests. If the transaction lacks commercial substance, you recognise no gain or loss.

Is an unrealised loss always eliminated?

No. If the loss gives evidence of impairment or a fall in net realisable value of the asset transferred, you recognise it in full. Otherwise it is eliminated to the extent of your interest.