**Investor's equity income from associate**

CFA Level II FRA
#1

CFAI Reading 16, Page 33, Example 6

Total unearned profit was 16000 from 40000 unsold inventory.

Two questions:

  1. Why both IFRS and GAAP requires investor’s share out of this 16000 unearned profit should be eliminated from investor’s equity income from associate? (want to understand the logic)
  2. Why this amount of unearned profit should be added back to the investor’s equity income from associate when it is realized?
#2

  1. To reduce the possibilities for manipulation of earnings. Until you sell it to a third (i.e., unaffiliated) party, you may be lying about the profit margin.

  2. You have to show it eventually; you show it when there’s outside evidence that the profit was earned.

#3

  1. This is to reduce duplicacy also , when inventory is sold to subsidiary investor will realize profit and during consolidation the part of the unsold inventory( Assets) will be added back to Investors Financials which will be duplicacy of work in investors P&L it will be booked as a cost when sold and the asme inventory will be added back to investors Balance sheet in the form of assets during consolidation, which is wrong.

  2. This point relates to first one only when the subsidiary sell the inventory only then Investor should realize the profit to remove duplicacy.