What Is the Effect of the Intercompany Sale of Land on Consolidated Net Income?

Accounting regulations dictate how a parent company must record and report investments in affiliates, especially with intercompany sales and purchases of land. To calculate its consolidated net income, the business follows regulations such as Financial Accounting Standards Board guidelines, international financial reporting standards and U.S. Securities and Exchange Commission edicts.

Intercompany Transactions

Intercompany transactions pertain to economic events among two or several affiliated companies. These may be associates, subsidiaries or businesses that are part of a joint venture or other temporary economic arrangement. These transactions benefit all involved companies, because they can save money, buy top notch products from sister companies and take advantage of expertise that is present within a business group or conglomerate. For example, company A and company B are integral to an American conglomerate that has business interests in areas as varied as insurance, pharmaceuticals, banking and sport arena management. Company A and company B may be better off purchasing goods from sister companies -- that is, businesses that are part of the holding company -- than reaching out to external suppliers.

Financial Statement Consolidation

Financial statement consolidation deals with the way a parent company -- also known as the investing business -- reports its standalone performance data along with the results of affiliates. The reporting process heeds how much money the investing business poured into affiliates, typically when calculating the equity stake. This is the number of shares the parent company owns divided by the total number of outstanding shares. The investing organization only consolidates its accounting data if it owns more than 50 percent of another company's equity. If ownership is between 20 and 50 percent, the company uses the equity method. This mandates that the business reduce or increase its stake when the investee declares dividends and losses or posts net income, respectively. A business that owns less than 20 percent of another company's equity uses the cost method.

Consolidated Net Income

Consolidated net income is money, in aggregate, that a parent company made over a given period -- say, a quarter or fiscal year. The business takes net income from all its affiliates and subtracts certain items to calculate its consolidated net income. These items include intra and intercompany transactions. Intracompany transactions happen between two units within the same legal entity -- such as factory A and factory B, which are integral to company A's worldwide network of 100 factories. Intercompany transactions cover economic events between two legal entities that are sister businesses -- such as business A, located in Argentina and business B, headquartered in New York.

Effect

An intercompany sale of land has no effect on a parent company's consolidated net income. This is because accountants eliminate intra and intercompany events during the consolidation process, generally to avoid double counting and income overstatement or understatement.

References

• "Advanced Financial Accounting"; Richard E.Baker, et al.; 2005
• "The CPA Journal"; Consolidated Financial Statements; Michael Davis, et al.; February 2008
• Acounting Standards; Consolidated Financial Statements; 2001
• "The CPA Journal"; Understanding Consolidation; Rebecca Toppe Shortridge, et al.; April 2007