SIC-3, "Elimination of Unrealised Profits and Losses on Transactions with Associates,"
Bilal Ahmad
Fractional CFO for Startups | Financial Modeling to Drive Growth and Profitability | Empowering Founders with Data-Driven Financial Leadership
SIC-3, "Elimination of Unrealised Profits and Losses on Transactions with Associates," was an interpretation issued by the Standing Interpretations Committee (SIC) under the International Accounting Standards Committee (IASC). This interpretation addressed the accounting treatment for unrealised profits and losses resulting from transactions between an investor and its associate. Here are the key aspects of SIC-3:
1. Scope and Purpose: SIC-3 was specifically focused on how to account for unrealised profits and losses that arise from transactions between an entity and its associates. The purpose was to provide clarity and consistency in applying IAS 28, "Investments in Associates," particularly regarding the elimination of unrealised profits and losses.
2. Unrealised Profits and Losses: When an entity sells goods or services to its associate, or vice versa, profits or losses resulting from these transactions may be unrealised. These unrealised profits and losses occur because the transactions may not yet have been confirmed with a third party.
3. Elimination Requirement: The interpretation required that unrealised profits and losses resulting from transactions with associates should be eliminated to the extent of the investor's interest in the associate. This elimination is necessary for the preparation of consolidated financial statements.
4. Reporting Unrealised Gains and Losses: The investor had to report its share of the profits or losses from these transactions in its financial statements. This accounting treatment was necessary to reflect the economic reality of the group's financial position and performance.
5. Downstream and Upstream Transactions: SIC-3 applied to both downstream transactions (where the investor sells to the associate) and upstream transactions (where the associate sells to the investor). The accounting treatment could differ slightly depending on the direction of the transaction, particularly concerning the impact on the carrying amount of assets.
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6. Disclosure Requirements: While SIC-3 itself did not establish specific disclosure requirements, the application of the interpretation in conjunction with IAS 28 and other relevant standards often necessitated disclosures about the nature and financial effects of transactions with associates.
7. Subsequent Developments: It is important to note that SIC-3, along with other SIC interpretations, has been superseded by subsequent developments in IFRS. In particular, IAS 28 has been amended over the years, and the current version of the standard includes guidance on accounting for transactions with associates, including the elimination of unrealised profits and losses.
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