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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Alder plc owns 30% of Birch Ltd, an associate, and uses the equity method. During the year Alder sold inventory to Birch for $400,000, at a profit of $100,000 to Alder. At the year end, half of this inventory remains unsold by Birch. How should Alder adjust for the unrealised profit in its consolidated financial statements?

Alder eliminates $15,000. Half of the inventory remains unsold, so unrealised profit is $50,000, and IAS 28 requires elimination only to the extent of the investor's 30% interest in the associate, which gives $15,000.

  1. AEliminate $15,000, being 30% of the unrealised profit of $50,000Correct
  2. BEliminate $50,000, being the whole unrealised profit on inventory still held
  3. CEliminate $30,000, being 30% of the total profit of $100,000
  4. DMake no adjustment because Birch is not a subsidiary

Explanation

Under IAS 28, unrealised profit on transactions with an associate is eliminated only to the extent of the investor's interest. Unsold inventory carries profit of 50% x $100,000 = $50,000, and 30% of this is $15,000. Eliminating 30% of the whole profit ignores that half the inventory has been sold on.

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