16 May 2022
if my company allocates its employees to its subsidiary company and provides them service, should it be treated as deduction in cost for holding company or revenue for the holding company
06 July 2024
When a company allocates its employees to its subsidiary company and provides services to them, the treatment of costs or revenue would depend on the nature of the arrangement and the accounting policies followed by the holding company. Here’s how it can be approached:
### Cost Allocation Scenario:
1. **Cost Allocation to Subsidiary**: - If the holding company allocates its employees to provide services to its subsidiary, the costs associated with these employees (such as salaries, benefits, overheads) are typically considered as part of the holding company’s operating costs. - These costs would be deducted from the holding company’s revenue when calculating its operating profit or loss.
2. **Internal Service Charges**: - The holding company may charge the subsidiary for the services provided by its employees. These internal service charges would then be treated as revenue for the holding company. - The revenue from these internal service charges offsets the costs associated with the allocated employees, potentially reducing the net cost impact on the holding company.
### Accounting Treatment:
- **Cost Allocation**: Generally, the costs incurred by the holding company in providing services (through allocated employees) to its subsidiary are recorded as expenses in the holding company’s financial statements. - **Revenue Recognition**: Any internal service charges billed to the subsidiary are recognized as revenue by the holding company.
### Practical Considerations:
- **Transfer Pricing**: It’s important to adhere to transfer pricing regulations and ensure that the internal service charges are set at arm’s length prices, similar to what the holding company would charge an unrelated third party. - **Financial Reporting**: The treatment (deduction of costs or recognition of revenue) should be consistent with the company’s financial reporting policies and regulatory requirements.
### Conclusion:
In summary, the allocation of employees and provision of services by the holding company to its subsidiary typically involves recording costs associated with these employees as expenses in the holding company’s financial statements. Any revenue generated from internal service charges would be recognized separately as revenue. This approach ensures transparency in financial reporting and adherence to accounting standards and regulatory guidelines.
CAclubindia
