Lecture 1 - Consolidation - Intercompany Transactions Concepts
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Rock LeeLecture 1 - Consolidation - Intercompany Transactions Concepts
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Rock LeeADVANCED FINANCIAL ACCOUNTING
AND REPORTING PART 2
ACC402
CONSOLIDATION INTERCOMPANY
TRANSACTIONS
LECTURE WEEK NO.
10 TO 11
DISCUSSION PROPER
In this topic, the focus is still on the consolidation of the financial statements after considering the
impact of the results of operation in an accounting period. However, we will now consider the
transactions involving related parties or in here, the parent and the subsidiary. Under the entity
concept, parent and subsidiary are treated as one economic entity hence, in consolidation the
transactions involving them must be cancelled.
Downstream transaction: Seller – Parent; Buyer – Subsidiary INTERCOMPANY
Upstream transaction: Seller – Subsidiary; Buyer – Parent TRANSACTIONS – INVENTORY
Unrealized profit from ending inventory is
Remember that we just have to look on the added to the Consolidated Cost of Sales
seller’s gross profit rate. Therefore, you need to while deducted in the consolidated net
identify the identity of the seller in the income.
Unrealized profit from beginning inventory is
intercompany transaction.
deducted to the Consolidated Cost of Sales
while added in the consolidated net income.
DISCUSSION PROPER
INTERCOMPANY TRANSACTIONS – DEPRECIABLE ASSETS
Just like intercompany transactions dealing inventory, intercompany transaction on depreciable
assets must be eliminated in preparing consolidated financial statement.
Seller must first be identified since the adjustments will be made to the seller.
If the transaction produced a loss, it must be If the transaction produced a gain, it must
added in the net income of the seller at the year of be deducted in the net income of the seller
sale. Then, amortized loss (loss divided by at the year of sale. Then, amortized gain
remaining useful life) will be deducted in the (gain divided by remaining useful life) will be
succeeding years in the net income of the seller. added back in the succeeding years in the
net income of the seller.
ADDITIONAL READINGS
IFRS 10 - Consolidated Financial Statemen
s
