Interesting read ( just a caption of a larger discussion ) I am intrigued by the number of times partnership is used or subsidiary. I have thoughts about that. Google's partners or subsidiaries? Or EDIG's ????? Or ????

http://r.search.yahoo.com/_ylt=AwrSbmYg3TVYrJ4AMzpXNyoA;_ylu=X3oDMTByM3V1YTVuBGNvbG8DZ3ExBHBvcwMzBHZ0aWQDBHNlYwNzcg--/RV=2/RE=1479953824/RO=10/RU=http%3a%2f%2fwww.wiley.com%2fcollege%2fbline%2f0471327751%2fsamplechapter%2fch04.pdf/RK=0/RS=cAhhjWIFnN25jEwtHpKO71MHVEE-

The purpose of consolidated statements is to present, primarily for the benefit of the
shareholders and creditors of the parent company, the results of operations and the
financial position of a parent company and its subsidiaries essentially as if the group
were a single company with one or more branches or divisions.2
140 CHAPTER 4 INTERCOMPANY TRANSACTION
Downstream
transaction: an
intercompany
transaction flowing from
the parent to the
subsidiary
Upstream transaction:
an intercompany
transaction flowing from
the subsidiary to
theparent
Lateral transaction: an
intercompany
transaction flowing from
one subsidiary to
another subsidiary
FIGURE 4-1 Directions of Intercompany Transaction
Parent Company
Downstream
Lateral
Subsidiary A Subsidiary B
Upstream Upstream
1 Exxon Mobil Corporation, 2002 10-K.
2 Accounting Research Bulletin, No. 51, “Consolidated Financial Statements” (New York: American Institute
of Certified Public Accountants, 1959), par. 1.
139-210.ch04rev.qxd 12/2/03 2:57 PM Page 140
In addition, ARB No. 51 also states that “… any intercompany profit or loss on assets
remaining within the group should be eliminated; the concept usually applied for this
purpose is gross profit or loss” (par. 6). Addressing profit or loss on assets transferred as a
result of intercompany transactions is important because many organizations, such as
Exxon Mobil, record intercompany inventory transactions (typically the largest dollar
amount of intercompany transactions) on a market value basis. For example, failure to
eliminate intercompany inventory transactions recorded at market value would result in an
overstatement of Sales, Cost of Goods Sold, and Inventory. Even if the intercompany
inventory transaction is recorded at cost, the Sales and Cost of Goods Sold accounts
would be overstated if they are not eliminated when preparing the consolidated financial
statements.
The percentage ownership interest by the parent in the subsidiary does not alter the
requirement to eliminate intercompany transactions. ARB No. 51 states:
The amount of intercompany profit or loss to be eliminated in accordance with
paragraph 6 is not affected by the existence of a minority interest. The complete
elimination of the intercompany profit or loss is consistent with the underlying
assumption that consolidated statements represent the financial position and
operating results of a single business enterprise. The elimination of the intercompany
profit or loss may be allocated proportionately between the majority and minority
interests.3
Paragraph 14 states that intercompany profit or loss may be allocated between majority
(controlling interest) and minority (noncontrolling) interest. In a downstream transaction,
all profit or loss accrues to the parent company because the parent company records the
sale. None of the gain or loss is recognized on the subsidiary’s books. As a result, the profit
or loss is not shared between the parent company stockholders and the noncontrolling
interest; that is, all the profit or loss accrues to the parent company stockholders.
This chapter takes the position that the allocation of profit or loss to parent company
stockholders and the noncontrolling interest is theoretically preferable in upstream and
lateral transactions. The gain or loss is divided between the parent stockholders and the
noncontrolling interest in an upstream or a lateral transaction because the subsidiary
records the sale and, therefore, records the gain or loss on the sale. Because the parent and
noncontrolling stockholders share ownership interest in the subsidiary, the gain or loss is
allocated proportionately to the two groups.