One affiliate may render services to another and result in intercompany fee revenue and expense (i.e., management fee charged to subsidiaries by a parent company).
Rendering of Services (Contd.)
The intercompany fee revenue and expense are offset in the working paper.
Both the parent company and the subsidiary should record the fee billing in the same accounting period.
Income Texas Applicable to Intercompany Transactions
No income tax effects associated with the elimination of the intercompany revenue or expenses since no profit or loss involved in these intercompany transactions.
It does not matter whether the parent company and its subsidiaries file separate income tax returns or a consolidated tax return.
II. Accounting for Intercompany Transactions Involving Profit (Gain) or Loss
For intercompany transactions involving profit or loss, the unrealized profits or losses must be eliminated in the preparation of consolidated financial statements until they are realized.
The Importance of Eliminating or Including Intercompany Profits (Gains) and Losses
Failure to eliminate unrealized profits and losses would result in consolidated income statements that report not only results of transactions with outsiders but also the results of related party activities within the affiliated group.
The Importance of Eliminating or Including Intercompany Profits (Gains) and Losses (Contd.)
Similarly, no recognition of realized gains (losses) would misstate the consolidated net income.
The management can manipulate consolidated net income if unrealized intercompany profits and losses were not eliminated.