Question

Explain the difference between upstream and downstream intra—entity transfers and how each affects the computation of noncontrolling interest balances.

Answer 1

Answer:

Intra-entity transfer refers to transfer of goods or products among the entities. Moreoften, such transfers are recorded as sale and purchase in respective entities internally only. This helps calculate operational efficiency. In real sense, for a external person, there is no financial change due to such transfer. Because the transfer is internal. Consolidated statements do not entertain such transfers.

Intra-entity transfers affect following accounts:

• Revenues and Reserves
• Cost of goods sold and Expenses
• Inventory
• Land, Buildings and Equipment
• Non-controlling Interest in Subsidiary's Income statement and Interest at the year end

The Difference:

Down-stream transfers are common and have no effect on controlling interest.

Upstream transfers are uncommon and have gain on subsidiary's books. All non-controlling interest balances are based on subsidiary's Net Income excluding intra-entity gain.

How each (upstream and downstream) affect the interest balances?

Downstream does not affect the interest balances. Unrealised gains belong to the parent company.

Upstream transfers affect the interest balances - holding company will have gain over subsidiary books. Unrealised gains belong to the subsidiary company. Before calculating interest share, gain is adjusted among holding and subsidiary companies.

Conclusion:

Transfer between related parties (such as holding and subsidiary companies) are very common. Any gain or loss , must be adjusted in order to prepare Consolidated Statements. There is no specific guideline on 'non-controlling interest' valuations.

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