What is an intercompany reconciliation?

3. Examples of intercompany transactions

Intercompany operations may involve trading operations, such as sale or purchase of inventory or fixed assets, providing or receiving of loans, guarantees or other commitments, declaration and payment of dividends. As a result of such transactions, balance sheet balances (e.g., accounts receivable, accounts payable, financial assets, financial liabilities, dividends payable and dividends receivable) and income statement transactions (e.g., sales, purchases, interest expenses, dividends paid or received) may arise.

Transactions from the parent to a subsidiary may be called downstream transactions, transactions from the subsidiary to the parent may be called upstream transactions, and transactions between subsidiaries may be called lateral transactions. Regardless of the direction, the intercompany transactions have no effect on the group as a whole and should be reconciled and subsequently eliminated in the consolidation process.

Consider the followings examples for Parent, Inc. that owns 100% shares in Subsidiary LLC.

Sale of goods: Parent, Inc. bought ten (10) gadgets for $3 (i.e., $30) and sold them to Subsidiary LLC for $4 (i.e., $40). Subsidiary LLC has sold eight (8) gadgets for $6 ($i.e., $48) outside the group, but two (2) units remained in Subsidiary LLC’s inventory at the end of the fiscal year. Subsidiary LLC has only paid half of gadget purchase price to Parent, Inc.

The following intercompany balances and transactions will need to be considered during the consolidation process for Parent, Inc. and Subsidiary LLC:

Parent, Inc.

  • Balance due from Subsidiary LLC in the amount of $20 (i.e., $40 x 50%)
  • Sale transaction with the cost of goods sold of $30 and revenue of $40

Subsidiary LLC

  • Balance due to Parent, Inc. in the amount of $20
  • Inventory balance with the purchase price of $8 (i.e., $4 x 2) as well as intercompany profit in this inventory of $2 (i.e., [$4 - $3] x 2)
  • Purchase transaction with the purchase price of $40
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