unrealised profit...help

ms sadat

can anybody help me to undrestand the unrealised profit .how do we get it refere to practice assesment one workbook 1.4b .DFS

Steve Collings

I don't have access to the Q but unrealised profits are essentially the profit element one company in a group (for example subsidiary) makes when it sells inventory to another company in the same group (for example to the parent company).

At the year-end, if the parent still has goods in its inventory which it bought from the subsidiary, then this transaction (for consolidation purposes) is merely a transfer of goods from one member company to the next. Any profit on this transfer cannot be recognised because it has not been sold to third parties i.e. entities outside of the group. Therefore for consolidation purposes, this unrealised profit element must be eliminated in order to reduce the inventory back down to the lower of cost or net realisable value (per IAS 2).

To do this you would work out the unrealised profit element and (assuming you are preparing the consolidated SFP) credit the inventory amount and debit consolidated retained earnings.

Hope that helps.

Steve

ms sadat

thank you!