Intercompany transactions are dealings between companies in the same group: sales of goods, services, management fees, cost recharges, loans and dividends. Each company records them as normal business, but the group cannot trade with itself, so IFRS 10 requires them to be eliminated in full in the consolidated financial statements.
What are intercompany transactions?
When one group company sells to, lends to or charges another, both record it: a sale and a receivable on one side, a purchase and a payable on the other. In each company’s own accounts that is correct. In the consolidated financial statements it would inflate revenue, costs, receivables and payables, because the group has only moved value from one pocket to another.
IFRS 10 therefore requires intragroup assets, liabilities, equity, income, expenses and cash flows to be eliminated in full, including profits or losses on intragroup transactions that are still held in assets such as inventory or fixed assets (paragraph B86(c)).
How are intercompany transactions eliminated?
| Type | What is eliminated on consolidation |
|---|---|
| Sales of goods and services | The selling company’s revenue against the buying company’s cost or asset |
| Balances owed | The receivable in one company against the payable in the other |
| Management fees and recharges | The fee income against the fee expense |
| Loans | The loan asset against the loan liability, and interest income against interest expense |
| Dividends | The dividend income in the parent against the distribution in the subsidiary |
| Unrealised profit | Profit on goods or assets still held inside the group at the period end |
Elimination only works when both sides agree. Before the close, match each pair of companies: the same amount, in the same currency and in the same period. Most differences are timing, such as an invoice booked by the seller on 30 June and by the buyer on 2 July, which is a cut-off issue to fix at source.
What does an intercompany elimination look like?
Why do intercompany transactions matter for finance teams in the GCC?
Groups in the region often charge management fees, share staff and lend between companies across borders, on different systems and in different currencies. Each of these needs an agreed balance every month, and cross-border charges can also carry VAT and withholding tax consequences that should be checked with your tax adviser. Our guide to group consolidation and intercompany eliminations covers the full process.
Questions people ask
Are intercompany transactions eliminated in each company’s own accounts?
No. Each company keeps them in its own books and statements. They are eliminated only when the group is consolidated.
What happens if the two sides do not agree?
The elimination leaves a difference in the consolidated accounts. Find the cause, usually timing, currency or a disputed charge, and correct it in the company books before the close rather than forcing it in the consolidation.
Are intercompany losses eliminated too?
Yes, in full. But under IFRS 10 an intragroup loss may also show that the asset is impaired, and that impairment is recognised in the consolidated statements.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.