Recording consolidating adjustments
Some examples of intercompany transactions and how to account for them will be discussed below.
The first common mistake is difficult to detect without knowing how the accounting system consolidates subsidiaries.The common mistake is to record the debit side of this transaction as part of the currency translation that is included in OCI.Generally, the debit side of this transaction should be included in net income rather than only as a component of OCI.Solely because of the change in the exchange rate, the company’s intercompany accounts (prior to any currency translation adjustments) no longer balance, as shown in Exhibit 2.Therefore, the German subsidiary must adjust its liability to Parent Company A from €6,961,000 to €7,433,000.Intercompany eliminations (ICE) are made to remove the profit/loss arising from intercompany transactions.
No intercompany receivables, payables, investments, capital, revenue, cost of sales, or profits and losses are recognised in consolidated financial statements until they are realised through a transaction with an unrelated party.
In essence, if the intercompany account is essentially a permanent investment in the subsidiary, the gain or loss on that account should be excluded from net income.
Unless the intercompany account meets this narrow exception, foreign-currency gains and losses on intercompany accounts should be included in determining net income.
The subsidiary’s retained earnings are allocated proportionally to controlling and non-controlling interests.
During a downstream transaction the parent sells an asset to its subsidiary: eliminating asset disposal (for parent company), asset acquired (for subsidiary), gain/loss from disposal; restoring the original cost of the asset and the accumulated depreciation based on original cost.
The subsidiary will credit its liability for €472,000.