When accounting for a parent’s share of an associate's retained earnings, how is PUP treated?

When accounting for a parent’s share of an associate's retained earnings, the concept of PUP, or Profit Unrecognized on Purchases, plays a crucial role. PUP arises when the parent company sells goods to the associate at a profit, and the associate has not yet sold those goods to an outside party. This unrealized profit can distort the financial performance reporting of the parent if not properly accounted for.

The correct treatment of PUP involves recognizing that this unrealized profit should not be included in the parent's share of the associate's retained earnings. Consequently, PUP works to reduce the parent's share of the associate's retained earnings to reflect the accurate financial position of both companies. By deducting the unrealized profit, the financial statements maintain their integrity and provide a true and fair view of the earnings that are ultimately realizable when the associate sells those goods to external parties.

In contrast, recognizing PUP as increasing the parent’s share of other comprehensive income, suggesting it is only relevant to cash flow statements, or disregarding it entirely would lead to misstated financial results, failing to represent the true economic performance of the parent and the associate. Proper accounting for PUP ensures that the financial statements accurately reflect the realizable income and prevents overstatement of