Question

Discuss the differences in upstream and downstream intracompany transfers. Why are they used and when are they used? What are the pros and cons of each method?

Answer 1

intracompany transfers

an inter-company transaction occurs between a parent and a subsidiary company.it is when one division ,department or unit within an organisation participated in a transaction with another division,department or unit within the same organisation.

it can happen for variety of reason .a parent company might sell inventory to the subsidiary company and vise versa.if there is a inter company transaction the accountant must treat that as arm;s length transaction where the two parties act independently. And this must be recorded in the statement of both account and also in the consolidated statement

upstream inter-company transaction

upstream inter company transaction happen when the flow is from the subsidiary to the parent entity.in an upstream transaction subsidiary records the transaction and related accounts.an upstream transaction when there is a transfer from the subsidiary company to the parent company.

down-stream transaction

a downstream transaction occur between a parent company to subsidiary.in this parent company records all related transaction and account for profit and loss.the transaction is visible in the parent company accounts ,and also in the consolidated statement.an example can be parent company selling inventory to subsidiary .

an upstream or downstream transaction happen between a parent and a subsidiary, this usually happen whenever they need an inventory,worker etc.and when the share this between the parent and subsidiary we call it as inter company transaction.

there are also so many pros and cons for this transaction.

some of the pros can be ,the transacted company get the inventory or the transaction element for a cheap price comparing to third-party.they also will have complete control over the transaction and can be customized based on the quality level they needed.

cons can be,financial accountant in the company might have trouble when recording the inter company transaction ,and might need professional help to account this properly. inter-company revenues and expenses may need proper audit check and might need professional attention for properly auditing this.