What are upstream and downstream transactions?

A downstream transaction flows from the parent company to a subsidiary. An upstream transaction flows from the subsidiary to the parent entity. In an upstream transaction, the subsidiary records the transaction and related profit or loss.

What is equity method of accounting for associates?

Equity method: a method of accounting by which an equity investment is initially recorded at cost and subsequently adjusted to reflect the investor’s share of the net assets of the associate (investee).

What does the equity accounting method Recognise in the consolidated financial statements of the investing company?

When using the equity method, an investor recognizes only its share of the profits and losses of the investee, meaning it records a proportion of the profits based on the percentage of ownership interest. These profits and losses are also reflected in the financial accounts of the investee.

How should an associate be accounted for in the consolidated statement of profit or loss?

Investments in associates accounted for using the equity method should be classified as long-term investments and disclosed separately in the consolidated balance sheet. The investor’s share of the profits or losses of such investments should be disclosed separately in the consolidated statement of profit and loss.

What is upstream and downstream inventory?

Upstream is a subsidiary selling into the parent entity; while downstream sales are from parent to subsidiary. Financially, it usually refers to loans, since dividends and interest generally flow upstream.

What is the impact of downstream and upstream transfers on the consolidated financial statements?

No difference exists in consolidated financial statements between upstream and downstream transfers. b. Downstream transfers affect the computation of the noncontrolling interest’s share of the subsidiary’s income but upstream transfers do not.

What is the difference between associate and joint venture?

An associate is an entity over which an investor has significant influence. A joint venture is a joint arrangement whereby the parties having joint control of the arrangement have rights to the net assets of the joint arrangement.

How do you account for associates?

Accounting for associates Associates are accounted for using the ‘equity method,’ whereby the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the associate.

What’s the difference between equity method and consolidation?

If the company owns more than 20\%, it will use the equity method, which reports its share of the firm’s earnings. The consolidated method includes all revenue and liabilities but goes into effect only when a company has a majority interest in the investment.

What is equity in accounting with example?

Equity = Assets – Liabilities. The word “equity” can also be used to refer to personal finances. For instance, if someone owns a $400,000 home, and has a $150,000 mortgage on it, then the owner can say he has “$250,000 in equity”, in the property.

What are the steps in consolidation of financial statements?

The following steps document the consolidation accounting process flow:

1. Record intercompany loans.
2. Charge corporate overhead.
3. Charge payables.
4. Charge payroll expenses.
5. Complete adjusting entries.
6. Investigate asset, liability, and equity account balances.
7. Review subsidiary financial statements.

What is the downstream transaction?

Downstream transaction: Parent company selling goods to Associate: Inventory is not in Parent company books. So, unrealized profit if there is any in unsold stock of associate. Then it should be reduced from investment value. Entry will be Dr. Unrealized profit and Cr. Investments.

How does entity a eliminate the effect of upstream transaction?

At the same time, Entity A eliminates the effect of upstream transaction with respect to its 20\% interest in consolidated financial statements. There are two approaches to this step and both are acceptable and used in practice.

What are upstream and downstream gains and losses under IAS 28?

IAS 28.28 requires gains and losses resulting from ‘upstream’ (sales by associate/joint-venture to investor) and ‘downstream’ (sales by investor to associate/joint-venture) transactions involving assets to be recognised only to the extent of unrelated investors’ interests.

What is the meaning of upstream oil companies?

Upstream companies: These are the companies which are primarily involved in exploration and production of crude oil I.e. extraction of crude oil from subsurface. Many national oil companies like ONGC, OIL,Petronas and private players like Shell, Reliance etc can be said to belong in this category .