A category of intercompany transaction that takes place in the direction from a parent to a subsidiary, being two entities within the same legal parent engaging in certain activities with each other, as part of each entity’s direct area and towards fulfillment of the overarching objectives of the parent entity. These include transactions arising and implemented between the parent company and the subsidiary (parent-subsidiary).

The transaction represents a flow of corporate activity in a up-down direction from the parent to the subsidiary. The flowing activities can take the form of the sale of assets or securities or a debt transaction. This occurs when the parent company sells to its subsidiary, in which case the former would be responsible for recording the transaction and any profit or loss that may arise. Only the parent company and its stakeholders would have details about such transactions. Thus, profit/ loss arising from such activities will be visible to the parent’s shareholders only and not to minority interests.

Downstream transactions, in addition to upstream (subsidiary to parent) or lateral (between subsidiaries) transactions, belong to the broader category of intercompany transactions. The financial effects of such transactions are eliminated to reflect a real picture of the state of affairs in terms of performance and financial reporting. For example, in a downstream transaction, this involves eliminating asset disposal (for the parent company), an asset acquired (for the subsidiary), gain/ loss from disposal, as well as restoring the original cost of the asset and the accumulated depreciation based on original cost.

Inventory sales in downstream transactions (from parent to subsidiary) are accounted for as internal transfers between departments of a single entity. This takes place at the level of  the consolidated income statements, where intercompany revenue and cost of sales arising from the transaction would be eliminated. Furthermore, in the consolidated balance sheet, there would be an elimination of intercompany payable and receivable, purchase, cost of sales, and profit/ loss arising from transactions.