Inter-company transaction in Consolidation of Financial Statement

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vijay (Querist)
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08 December 2022 The Indian subsidiary company shows debtor of INR 60,000 receivable from Foreign Parent company but the Foreign Parent company shows creditor of eqv. amount of INR 50,000 , the difference is mainly due to some invoices that were recorded in Parent company at later date.
Now while preparing Consolidated Financial statement , how to treat above inter-company adjustment ?
Please advise

CA Punit

CA Punit (Expert)
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12 December 2022 Usually, such differences are identified as part of ICP reconciliations. The respective amounts accounted by parent and subsidiary only to be nullified in consolidation.

Lets also get views from other experts.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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01 August 2024 When consolidating financial statements, inter-company transactions such as receivables and payables between a parent company and its subsidiaries need to be adjusted to avoid double counting and to present a true and fair view of the consolidated financial position. Here’s how you can handle the adjustment for the scenario described:

### **1. Identify the Adjustment Requirement**

- **Indian Subsidiary** shows a receivable of INR 60,000 from the **Foreign Parent Company**.
- **Foreign Parent Company** shows a payable of INR 50,000 to the **Indian Subsidiary**.
- The difference of INR 10,000 (INR 60,000 - INR 50,000) is due to timing differences in recording the invoices.

### **2. Inter-Company Reconciliation**

You need to adjust for the following:

- **Eliminate Inter-Company Balances:** The receivable and payable balances between the parent and subsidiary need to be eliminated in the consolidation process to avoid inflating both assets and liabilities.

### **3. Accounting Entries for Consolidation**

1. **Eliminate Receivables and Payables:**
- **Receivable from Parent:** Debit (Reduce) the receivable amount of INR 60,000 in the subsidiary’s books.
- **Payable to Subsidiary:** Credit (Reduce) the payable amount of INR 50,000 in the parent company’s books.

The adjustment entry to be made in the consolidated financial statements would be:

```plaintext
Debit: Inter-Company Receivables (Subsidiary) - INR 60,000
Credit: Inter-Company Payables (Parent) - INR 50,000
```

2. **Adjust for Timing Differences:**
- Record any necessary adjustments for the timing differences, i.e., the INR 10,000 difference. If the invoices are recorded in different periods, this timing difference needs to be adjusted based on the actual date when the transaction should have been recorded.

For timing differences, you may need to ensure that the consolidated financial statements accurately reflect the timing of the transactions. This might involve adjusting the timing of revenue and expense recognition.

### **4. Presentation in Consolidated Financial Statements**

- **Consolidated Balance Sheet:**
- Ensure that the receivable and payable amounts are fully eliminated so that they do not appear as assets or liabilities in the consolidated balance sheet.

- **Consolidated Income Statement:**
- Any impact on income or expenses due to timing differences should be adjusted accordingly in the consolidated income statement to reflect the correct earnings.

### **5. Additional Considerations**

- **Currency Conversion:** If the foreign parent company and the Indian subsidiary report in different currencies, make sure to apply appropriate currency conversion rates for consolidation.
- **Documentation:** Maintain thorough documentation of all adjustments and reconciliations performed during the consolidation process.

### **Summary:**

In summary, for inter-company transactions in consolidation:
- **Eliminate inter-company balances** to prevent double counting.
- **Adjust for any timing differences** to ensure accurate financial reporting.
- Ensure that the consolidated financial statements accurately reflect the financial position and performance of the group.

If needed, consult with a financial advisor or accountant who specializes in consolidation to ensure compliance with accounting standards and accurate financial reporting.

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