Intercompany eliminations remove the financial effects of transactions between entities within the same group during consolidation. They prevent double-counting of revenue, costs, assets, and liabilities, ensuring consolidated financial statements reflect only transactions with external parties.
In Depth
When separate entities within a corporate group trade with each other, both sides record the transaction — one records revenue, the other records a cost. Without elimination, the consolidated accounts would overstate both revenue and expenses.
Common intercompany transactions requiring elimination include: sales of goods or services between subsidiaries, management fees charged by the parent, intercompany loans and interest, dividends paid between group companies, and intercompany asset transfers.
The elimination process during consolidation removes these internal transactions, leaving only external-facing activity. For example, if Subsidiary A sells £1M of goods to Subsidiary B, the consolidated P&L eliminates £1M from revenue and £1M from COGS, as the transaction is purely internal.
FP&A teams must account for intercompany eliminations in consolidated budgets and forecasts. This requires tracking intercompany transactions separately and ensuring both sides of each transaction agree (intercompany reconciliation). Mismatches create reconciliation problems during consolidation.
For UK groups, intercompany elimination is required under both FRS 102 and IFRS for the preparation of consolidated financial statements. Companies House requires consolidated accounts for groups exceeding specific size thresholds. Unrealised profits on intercompany inventory transfers must also be eliminated — if Subsidiary A sells inventory to Subsidiary B at a markup, the profit is eliminated until the inventory is sold externally.
Real-World Example
A UK group has three subsidiaries. The parent charges each subsidiary £200K annually for management services (£600K total intercompany revenue). Subsidiary A sells £500K of components to Subsidiary B. During consolidation, the FP&A team eliminates £1.1M of intercompany revenue and corresponding costs. The consolidated revenue of £25M reflects only external sales, compared to £26.1M in aggregate subsidiary revenues.
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