Intercompany eliminations
What gets removed when you consolidate a group, and why.
Quick answer
Intercompany eliminations remove transactions and balances between companies in the same group when you prepare consolidated accounts. Without them, the group would report sales to itself, owe money to itself and earn fees from itself. Typical eliminations are intercompany sales and purchases, loans and the related receivables and payables, management fees, dividends paid within the group, and the parent's investment against the subsidiary's share capital.
Why eliminations matter
A consolidated financial statement presents the group as a single economic entity. A sale from the parent to its subsidiary isn't a sale to the outside world, so it must come out. Standards such as IFRS 10 require intragroup balances and transactions to be eliminated in full.
The common eliminations
| Intercompany item | What you eliminate |
|---|---|
| Sales and purchases between group companies | Group revenue and group cost of sales by the same amount |
| Unrealised profit in stock | Profit on goods still held by the buying company at period end |
| Loans between group companies | The receivable in the lender against the payable in the borrower |
| Interest on intercompany loans | Interest income against interest expense |
| Management fees and recharges | Fee income against fee expense |
| Dividends from subsidiaries | Dividend income in the parent against dividends paid in the subsidiary |
| Investment in subsidiaries | Parent's investment against the subsidiary's share capital and pre-acquisition reserves |
Worked example
Harbour UK sells goods costing £70,000 to its subsidiary Harbour Retail for £100,000, and Harbour Retail sells all of them to customers in the same month for £130,000.
| Harbour UK | Harbour Retail | Elimination | Group | |
|---|---|---|---|---|
| Revenue | £100,000 | £130,000 | −£100,000 | £130,000 |
| Cost of sales | £70,000 | £100,000 | −£100,000 | £70,000 |
| Gross profit | £30,000 | £30,000 | £0 | £60,000 |
Group profit doesn't change, but revenue and cost of sales are no longer inflated. If Harbour Retail still held the goods at month end, the £30,000 profit Harbour UK made on them would also be unrealised and removed from group stock and profit.
Making eliminations reliable
- Use dedicated intercompany accounts for each counterparty.
- Reconcile both sides before you consolidate.
- Document recurring eliminations so they're applied the same way each month.
Consolidation apps apply recurring eliminations automatically. In Joiin, eliminations are included on every plan.
Frequently asked questions
What is an intercompany elimination?
An adjustment made on consolidation to remove transactions and balances between companies in the same group, so the group reports only dealings with outside parties.
Do intercompany eliminations affect group profit?
Eliminating matched sales and costs doesn't change group profit. Eliminating unrealised profit on stock still held in the group does reduce it.