Question

If the transaction is only between companies owned by the same parent, is it really a transaction? Can you have a transaction between two companies owned by the same parent? Why not? Please explain in detail.

Answer 1

In growing companies, especially multinational companies, there are numerous numbers of transaction, involving different currencies & tax treatment. Transaction may occur between the companies owned by the same parent which is considered a valid transaction. Transaction might involve parent company & a subsidiary company or subsidiary to subsidiary transaction. They can occur for variety of reasons.

Yes, we can have the transaction between the two companies owned by the same parent, however, these transaction must be recorded in the books of both the companies , accountant should treat the transaction at arm length price(i.e. the price at which two parties act independently as if they have no relation with each other.

At the consolidated level, the accountant must eliminate the inter company transaction so that no profit or loss is recognized. For example: selling an asset/inventory to parent company or subsidiary or vise-versa.

Further, if a company provides any service to the other company with the same parent, & charges for the same, then while preparing the consolidated books of accounts, the share of profit of minority interest will be shared by the stakeholders of parent company. Also, while preparing the consolidated statements, the accountant must refer the accounting standards & rules & principles as described by the prescribed authorities.