What is the accounting treatment for unrealised profit when transactions occur between a parent and an associate?

In the context of accounting for transactions between a parent and an associate, unrealised profits, or profits that have not been realised through actual cash flows, are an important consideration. When a parent company transacts with an associate, any profits that arise from these transactions must be treated carefully in financial statements to avoid overstating income or equity.

The correct treatment is that unrealised profit (PUP) remains in the financial records despite not being eliminated during consolidation. This is necessary because the relationship between a parent and an associate does not typically require the formal consolidation process that eliminates all intra-group transactions. While profits arising from transactions with subsidiaries are eliminated to prevent double counting, the same does not apply to associates.

Thus, unrealised profits are recorded in the parent’s financial statements until they are realised. When the associate generates profit through its operations and eventually sells goods or services, the unrealised profits would then transition into realised profits. Maintaining these unrealised profits in the accounts reflects the economic reality of the transactions, ensuring that financial statements provide a true and fair view of the parent company's standing.

Recognizing that unrealised profits from transactions with an associate do not get cancelled out highlights the distinction between how transactions are treated within wholly-owned subsidiaries compared to those involving associates