Question

Scenario

Many companies transfer inventories from one subsidiary to another. Often the companies have integrated operations in which one subsidiary provides raw materials, another manufactures finished products and another distributes and perhaps another sells the product at retail.

Required:

Discuss how intercompany transfers should be treated for consolidation purposes.

NB: make reference to the related IFRS’s an IAS’s in your discussion.

Answer 1

IFRS 10: Is objective is to establish principles for the presentation and preparation of consolidated financial statements whenever an entity controls one or more other entities.

while making the Consolidated statement any inter-group assets and liabilities should be eliminated. removing profit and losses from intergroup transactions by eliminating profit/ loss element from remaining stock in each other.

There are 2 types of stock movement in intercompany.

1) Upstream: Here subsidiary sold/transfer goods to holding company. if any inventory left at the closing date then it should be adjusted by eliminating intercompany revenue and cost of goods sold from the income statement and companies receivable and payable from the consolidated balance sheet along with adjusting profit/loss from controlling and non-controlling interest proportionately.

2) Down Stream: Here parent transfer goods to the subsidiary. if any inventory left at the closing date then it should be adjusted by eliminating intercompany revenue and cost of goods sold from the income statement and companies receivable and payable from the consolidated balance sheet along with adjusting profit/loss from controlling and non-controlling interest proportionately.