ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements
Ivy plc, a listed group, has an associate, Jasper Ltd, in which it holds 25%. The finance director proposes not to eliminate unrealised profits on inventory sold to Jasper because the amount ($0.6 million) is below the group's usual materiality level for profit, although group profit is just below a bonus target. Which response is most consistent with IFRS and ACCA ethical principles?
Ivy should eliminate the unrealised profit as IAS 28 requires. Omitting a known misstatement to reach a bonus target is not a legitimate materiality judgement and would breach the ACCA fundamental principles of integrity and objectivity, and a note would not cure it.
- AAccept the proposal because the amount is below materiality
- BEliminate the unrealised profit in line with IAS 28, as intentionally omitting it to meet a bonus target breaches integrity and objectivityCorrect
- CDisclose the unrealised profit in a note and leave the profit unadjusted
- DDefer the adjustment to the following year when the inventory is sold
Explanation
IAS 28 requires elimination of unrealised profit to the extent of the investor's interest. Deliberately leaving out an error to achieve a bonus target is not an acceptable use of materiality and breaches the fundamental principles of integrity and objectivity. Disclosure in a note does not replace the required adjustment.
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