When a parent sells goods to an associate, how is the consolidated statement of financial position (CSFP) affected?

When a parent sells goods to an associate, the primary concern is how this transaction affects the consolidated statements, particularly in relation to potentially unrealized profit. When goods are sold to an associate, any profit that remains unrealized in inventory must be accounted for in the financial statements to avoid inflating profits or assets inappropriately.

In this context, the correct choice highlights that the carrying amount of the investment in the associate is reduced by the share of the unrealized profit in inventory, often referred to as PUP (Profit Unrealized in Purchases). This adjustment is necessary to ensure that the statement of financial position reflects the underlying economic reality. Unrealized profits from intercompany transactions cannot be recognized in consolidated financial statements, so they must be eliminated to avoid overstating the value of assets and profits. By reducing the carrying amount of the investment in the associate by this share of unrealized profit, the consolidated statement of financial position is more accurately presented.

Understanding this concept is crucial for financial reporting because it ensures that profits from transactions between related entities do not misrepresent the group's financial health. This treatment aligns with accounting standards that require consolidation practices to provide a true and fair view of the group's financial situation.