Question

do intra-entity asset entries have the potential to overstate the financial performance of the organization in the short-term?

Explain

Answer 1

The FASB issued ASU 2016-16[1] in October 2016 eliminating the existing exception in GAAP that prohibits the recognition of income tax consequences for most intra-entity asset transfers. The exception has been retained for intra-entity asset transfers of inventory only. As a result, entities will now be required to recognize current and deferred income tax consequences of intra-entity asset transfers (other than those of inventory) when the transfer occurs.

A. Downstream sale/transfer:
Occurs when the investor sells to the investee.

B. Upstream sale/transfer:
Occurs when the investee sells to the investor

• At the time of intra-entity sale/transfer:The individual accounting systems of the two companies will record the transfer as a sale by one party and as a purchase by the other.
• At the end of the fiscal year: when a portion of the goods are not consumed or resold to unrelated parties:This portion of intra-entity profits/gains/losses should be deferred.

C. When the goods are subsequently consumed or resold to unrelated parties:

• The deferred profits/gains/losses should be recognized in the same period.

intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Companies in a business combination often retain their legal identities as separate operating centers and maintain their own recordkeeping. Inventory sales between the companies must be recorded.

• The seller records revenue, and the buyer enters the purchase into its accounts.companies that make up a business combination frequently retain their legal identities as separate operating centers and maintain their own recordkeeping. Thus, inventory sales between these companies trigger the independent accounting systems of both parties
• The seller duly records revenue, and the buyer simultaneously enters the purchase into its accounts. For internal reporting purposes, recording an inventory transfer as a sale/purchase provides vital data to help measure the operational

According an inventory transfer as a sale/purchase provides vital data to measure operational efficiency of each enterprise. From a consolidated perspective, neither a sale nor a purchase has occurred.

• It is an internal movement of inventory that creates no net change in the financial position of the business combination as a whole. In the consolidated financial statements, the transfers are eliminated.
• The consolidated statements reflect only transactions with outside parties. Worksheet entries report the perspective of the consolidated enterprise.
• From a consolidated perspective neither a sale nor a purchase has occurred. An intra-entity transfer is merely the internal movement of inventory, an event that creates no net change in the financial position of the business combination taken as a whole.
• When producing consolidated financial statements, the recorded effects of these transfers are eliminated so that consolidated statements reflect only transactions with outside parties.

Worksheet entries serve this purpose; they adapt the financial information reported bythe separate companies to the perspective of the consolidated enterprise. The entire impactof the intra-entity transactions must be identified and then removed. Deleting the effects of the actual transfer is described here first.