Inter-company sale of PPE with profit.

[Mohamed Faizal]

Issue: A subsidiary (less than 100% owned) sold a land to Holding company with a profit (upstream transaction). This unrealized profit shall be eliminated while preparing the consolidated financial statements. Because of this elimination, Net profit or loss as per the consolidated financial statements is not matching with that of stand alone financial statements of holding company (prepared using equity method)

Question here is: (1). Do we need to adjust this inter-company profit in the books of holding company?
(2) Is it compulsory to maintain the net profit and Equity at same amount in both consolidated financial statements as well as separate financial statements of Holding company?

 

[CaesarSalad]

(1) No.
(2) No.

As you are on the equity method, you do not make any direct adjustments to the books of the holding company as you do not consolidate their accounts. There is no need to match/reconcile apart from tracking intra-entity balances for elimination and ensuring that the holding company is properly applying GAAP and has accurate records.

Assuming this was an arms-length transaction I believe what you would do is indefinitely eliminate *your ownership share* of the profit in your books, which you already did. If/when the holding company ever sells the land to a third party, you would recognize this profit. This requires that you keep track of it off the books in memo records.

Note that had this been a sale of depreciable property, you would eliminate the profit and then gradually recognize it on a straight-line basis over the life of the asset. But since it's land, the only profit recognition trigger would be sale to a third-party.

Also, this is US GAAP. Not sure if the same for other GAAP.