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unrealised profit and investment in associate
03-06-2011, 02:19 AM
Post: #1
unrealised profit and investment in associate
the example is as follow
"A Group" acquired 40% of the share of "B Ltd".
total cost of investment of A in B amounts to $100,000
on Dec 30th, A sold to B inventory for $1,000,000, 100% mark-up on cost
until Dec 31st, B had not accomplished any sales
that is, the whole inventory sold to B by A remained in B's inventory had $1,000,000 in value (with unrealised profit $500,000)
problem as follow
since B had not make and sales, in A's statement, no investment income is recognised, neither the investment in B ($100,000) is adjusted.
the share of unrealised profit arising from the downstream sales of $200,000 (40% of $500,000) shall then be adjusted to A's investment income, which brings A's investment income to $-200,000
if A's investment in B ($100,000) is then adjusted by this figure, it will become $-100,000 ($100,000 - $200,000)

my question is
1. can an unrealised profit ($200,000 in the example) bring an investment income (nil or positive) to an investment loss? (i can't find any guidance from the standards)
2. if nil or positive investment can change to investment loss, should the loss recognised be limited to carrying amount of the investor's investment in the investee? ( for this question, the answer is "yes" as per ias 28, what's your opinion)

thank you.
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