Reasons for not consolidating subsidiaries
Inventory sales in downstream transactions (from parent to subsidiary) are accounted for as internal transfers between departments of a single entity: Financial consolidation is more than just adding up numbers from separate financial statements.
In both lateral and upstream transactions, the subsidiary records the transaction and the profit/loss from it.
Thus, the profit/loss can be shared between majority and minority interests, as the parent’s shareholders and minority interest share the ownership of the subsidiary.
Thus, profit/loss will be visible to the parent’s shareholders only, and not to the minority interest’s.
: This is a transaction between two subsidiaries of the same company.
Intercompany eliminations (ICE) are made to remove the profit/loss arising from intercompany transactions.
No intercompany receivables, payables, investments, capital, revenue, cost of sales, or profits and losses are recognised in consolidated financial statements until they are realised through a transaction with an unrelated party.
The subsidiary’s retained earnings are allocated proportionally to controlling and non-controlling interests.
During a downstream transaction the parent sells an asset to its subsidiary: eliminating asset disposal (for parent company), asset acquired (for subsidiary), gain/loss from disposal; restoring the original cost of the asset and the accumulated depreciation based on original cost.
The goal is to establish some guidelines for the Estonian legislature.