Q6-3 An upstream sale occurs when the parent purchases items from one or more subsidiaries.
A downstream sale occurs when the sale is made by the parent to one or more subsidiaries.
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.
There are three main types of intercompany transactions: downstream transactions, upstream transactions, and lateral transactions.Tracking, settling, and reconciling intercompany transactions is a time-consuming, resource-draining task for finance and accounting staff in many companies, especially as organizations expand their operations globally.For businesses with immense data volumes, nonstandard procedures, or insufficient automation, this process is highly vulnerable to human errors that can lead to inaccurate financial statements.Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interestson a proportionate basis (upstream).Q6-4 As in all cases, the total amount of the unrealized profit must be eliminated in preparing the consolidated statements.Q6-2 An inventory transfer at cost results in an overstatement of sales and cost of goods sold.