Adjusting entries consolidating statements
Intercompany transactions must be adjusted correctly in consolidated financial statements in order to show their impact on the consolidated entity instead of its impact on the parent or subsidiaries solely.
Understanding how intercompany transactions are recorded in each concerning entity’s journal entries and the impact of the transaction on each entity is necessary to determine how to adjust intercompany transactions in the consolidated financial statement.
: This is a transaction between two subsidiaries of the same company.
This method can only be used when the investor possesses effective control of the investee or subsidiary which often, but not always, assumes the investor owns at least 50.1% of the subsidiary’s shares or voting rights.
The consolidation method works by reporting the subsidiaries balances in a combined statement along with the parent company’s balances, hence ‘consolidated’.
In both lateral and upstream transactions, the subsidiary records the transaction and the profit/loss from it.
Thus, the profit/loss can be shared between majority and minority interests, as the parent’s shareholders and minority interest share the ownership of the subsidiary.