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

Gamma holds 40% of Zeta, an associate. During the year Gamma sold inventory to Zeta for $20m at a margin of 25% on selling price. At the year end Zeta still held half of this inventory. How should Gamma adjust for the unrealised profit in its consolidated financial statements?

Gamma eliminates $1.0m. The profit on the sale is $5m, half is still held, so unrealised profit is $2.5m, and only Gamma's 40% share is removed. The credit reduces the investment in the associate and the debit reduces the share of associate profit.

  1. AEliminate $1.0m, being 40% of the unrealised profit of $2.5m, against the share of associate profit and the investmentCorrect
  2. BEliminate the full $2.5m of unrealised profit against group inventory only
  3. CEliminate $2.0m, being 40% of the full $5m profit, against revenue
  4. DMake no adjustment, because Zeta is not controlled by Gamma

Explanation

Profit on sale is $20m x 25% = $5m. Half remains in inventory so unrealised profit is $2.5m. IAS 28 requires elimination only to the extent of Gamma's interest: 40% x $2.5m = $1.0m, deducted from the share of associate profit and the investment (the inventory is the associate's). Eliminating the full amount is wrong because Gamma does not control Zeta.

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