Guide
Intercompany eliminations: how they work, with journal examples
Consolidated financial statements present the group as a single economic entity, so transactions between group companies must be removed. IFRS 10 (paragraph B86(c)) requires intragroup assets, liabilities, equity, income, expenses and cash flows to be eliminated in full. This guide shows what that means in practice.
Updated · 8 min read · Conso 360
Key points
- Both sides are eliminated: the receivable against the payable, the revenue against the cost.
- Profit on assets that are still held inside the group is unrealised and must be removed as well.
- Differences between the two sides should be investigated before eliminating, not plugged.
- Eliminations are consolidation entries; they do not change the entities' own books.
What has to be eliminated
- Intercompany receivables and payables.
- Intragroup loans, and the related interest income and expense.
- Intragroup sales and purchases of goods and services.
- Unrealised profit in inventory or fixed assets bought from another group company.
- Dividends paid by subsidiaries to the parent.
- The parent's investment in each subsidiary against the subsidiary's equity at acquisition.
In all the examples below, the parent owns 100% of each subsidiary and amounts are in thousands of euros. Debits and credits are consolidation entries.
Example 1: intercompany receivable and payable
The parent invoices Subsidiary A for management services of 320, unpaid at year end. The parent shows a receivable of 320 and Subsidiary A a payable of 320. From the group's point of view, the group owes nothing to itself.
| Account | Debit | Credit |
|---|---|---|
| Trade payables (Subsidiary A) | 320 | |
| Trade receivables (Parent) | 320 | |
| Management fee income (Parent) | 320 | |
| Management fee expense (Subsidiary A) | 320 |
The balance sheet and income statement entries are separate: one removes the open balance, the other removes the year's transactions. Group profit is unchanged, because income and expense cancel out.
Example 2: intragroup sale of goods
The parent sells goods that cost it 700 to Subsidiary A for 1,000. By year end Subsidiary A has sold all of them to external customers. The group's revenue and cost of sales are both overstated by 1,000.
| Account | Debit | Credit |
|---|---|---|
| Revenue | 1,000 | |
| Cost of sales | 1,000 |
Example 3: unrealised profit in inventory
Now assume Subsidiary A still holds 40% of the goods at year end. Its inventory includes them at 400, but the cost to the group is only 280. The parent's margin on those goods, 120, has not been earned from anyone outside the group.
| Account | Debit | Credit |
|---|---|---|
| Revenue | 1,000 | |
| Cost of sales | 880 | |
| Inventory | 120 |
Cost of sales is reduced by 880 rather than 1,000, so that consolidated cost of sales equals the group's cost of the goods sold externally: 700 × 60% = 420. Inventory is reduced to the group's cost of 280.
Eliminating unrealised profit usually creates a temporary difference for deferred tax under IAS 12. If a partly owned subsidiary is the seller, the elimination is also shared with non-controlling interests. Both points need case-by-case judgement.
Example 4: intragroup loan and interest
The parent lends 5,000 to Subsidiary B at 4% a year. Interest of 200 has been charged and paid.
| Account | Debit | Credit |
|---|---|---|
| Loan from parent (Subsidiary B) | 5,000 | |
| Loan to subsidiary (Parent) | 5,000 | |
| Interest income (Parent) | 200 | |
| Interest expense (Subsidiary B) | 200 |
If the loan is in a currency that is foreign to one of the two entities, the exchange differences on it do not eliminate; see foreign currency translation.
Example 5: intragroup dividend
Subsidiary A pays a dividend of 400 to the parent out of profits earned after acquisition. The parent records dividend income; Subsidiary A reduces its retained earnings. For the group, cash has only moved from one pocket to another.
| Account | Debit | Credit |
|---|---|---|
| Dividend income (Parent) | 400 | |
| Retained earnings (Subsidiary A, dividend paid) | 400 |
If the subsidiary were 80% owned, only 320 would reach the parent; the 80 paid to minority shareholders reduces non-controlling interests and stays in the consolidated statements as a distribution to them.
When the two sides do not agree
In practice the receivable and payable rarely agree on the first attempt. Typical causes are invoices booked in different periods, goods or cash in transit, different exchange rates and postings without the intercompany partner code.
- Reconcile intercompany balances between the entities before the consolidation, not during it.
- Correct posting errors in the entity books, so they do not recur in the next period.
- Record genuine timing items, such as cash or goods in transit, as identifiable consolidation adjustments.
- Keep any accepted residual difference visible and documented, rather than hiding it in an elimination.
A structured process for this step is described in intercompany reconciliation.
How Conso 360 handles eliminations
In Conso 360, balances recorded with an intercompany partner are eliminated against control accounts automatically on every consolidation run, and the parent's investments are eliminated against subsidiary equity. Entries that depend on judgement, such as unrealised profit, deferred tax effects and dividend adjustments, are recorded as separate consolidation adjustments so they remain visible to reviewers. See financial consolidation software.
This guide is general information for finance professionals, not accounting, tax or audit advice. Apply it to your own facts with your advisers and auditors. Standard references are to IFRS Accounting Standards as issued by the IASB.