Question

In dealing with intercompany transactions the direction matters. These directions are known as an upstream transaction or a downstream transaction. Please consider the following questions: • Define an upstream transaction and provide an example. • Define a downstream transaction and provide an example. • Are the transactions substantially different? Please justify the reason why each transaction is treated differently.

Answer 1

Inter-company transactions happen between companies under a same group,or between departments or divisions of one company.

It may be between a parent & one or more subsidiary/ies.

They enter into transactions for a variety of reasons like sale of asset, inventory or extension of loans.

In an upstream transaction, the transaction starts from the subsidiary to the parent.For example, the sale of asset by the subsidiary to the parent--here, the subsidiary records the transaction, just as it has sold to an outsider,recording also the profit/loss on the sale.

In a downstream transaction, the transaction starts from the parent down to the sudsidiary.For example, the sale of asset by the parent to teh subsidiary --here, the parent records the transaction, just as it has sold to an outsider,recording also the profit/loss on the sale.

Yes.The transactions are substantially different, for the following reasons:

In each of the above, the respective party selling the asset records profit/loss in its own books , for purposes of accuracy in accounting & measurement of profitability/otherwise in their distinct operations, and also due to the accountability to their own shareholders.

The buying party records at its cost , which includes the seller's profit margin.

which when consolidated, will be removed , as at the end both involve the same group company.

Thus. Inter-company sale/purchase are eliminated along with the recorded entries for profit/loss.