Intercompany Elimination

What Is Intercompany Elimination?

Intercompany elimination is the process of removing transactions that occur between entities within the same corporate group when preparing consolidated financial statements. Without eliminations, internal activity would artificially inflate revenue, expenses, assets, and liabilities.

For example, if Parent Company sells $1M of goods to Subsidiary Company:

• Parent records $1M revenue
• Subsidiary records $1M inventory/expense
• Consolidated statements would show $2M of activity for what’s really just internal movement

Intercompany elimination removes both sides, showing only transactions with external parties.

Why Are Intercompany Eliminations Required?

GAAP/IFRS Requirements

Accounting standards require that consolidated financial statements present the group as if it were a single economic entity. Internal transactions must be eliminated to avoid:

• Double-counting revenue
• Overstating assets
• Misrepresenting the group’s true financial position

Accurate Financial Picture

Stakeholders need to understand the group’s dealings with the outside world:

• How much revenue comes from external customers?
• What assets does the group actually own?
• What are the true liabilities to third parties?

Types of Intercompany Transactions

Intercompany Sales

One entity sells goods or services to another:

• Eliminate revenue in selling entity
• Eliminate cost/expense in buying entity
• Eliminate any unrealized profit in inventory

Intercompany Loans

One entity lends money to another:

• Eliminate note receivable in lending entity
• Eliminate note payable in borrowing entity
• Eliminate interest income and expense

Intercompany Dividends

Subsidiary pays dividends to parent:

• Eliminate dividend income in parent
• Eliminate dividend payment in subsidiary

Management Fees and Allocations

Corporate charges subsidiaries for shared services:

• Eliminate management fee income
• Eliminate management fee expense

Intercompany Asset Transfers

One entity transfers fixed assets to another:

• Eliminate gain/loss on transfer
• Adjust depreciation for any profit element

The Elimination Process

1. Identify Intercompany Activity

Track all transactions between related entities:

• Sales and purchases
• Loans and interest
• Dividends
• Service charges
• Asset transfers

2. Reconcile Intercompany Balances

Ensure both sides of each transaction agree:

• Entity A’s receivable from B = Entity B’s payable to A
• Entity A’s revenue to B = Entity B’s expense from A

3. Prepare Elimination Entries

Create journal entries that remove intercompany activity:

Debit: Intercompany Revenue     $1,000,000
Credit: Intercompany COGS                   $1,000,000

Debit: Intercompany Payable     $500,000
Credit: Intercompany Receivable             $500,000

4. Post to Consolidation

Apply eliminations at the consolidated level without affecting individual entity books.

Common Challenges

Out-of-balance situations: One entity recorded the transaction differently than the other

Timing differences: Transactions recorded in different periods

Currency translation: Multi-currency intercompany requires FX considerations

Partial eliminations: Some transactions eliminate fully, others partially (minority interest)

Volume: Large groups may have thousands of intercompany transactions

Manual vs. Automated Eliminations

How Go Fig Handles Intercompany

Go Fig automates intercompany processing:

Automatic identification: Flags intercompany transactions based on entity relationships

Real-time reconciliation: Matches intercompany balances continuously, not just at month-end

Exception management: Surfaces out-of-balance situations immediately

Elimination generation: Creates elimination entries automatically

Multi-currency support: Handles FX translation and intercompany in different currencies

Audit trail: Documents every elimination with source transaction references

Best Practices

1. Establish intercompany policies: Clear rules for pricing, timing, and documentation
2. Use intercompany accounts: Dedicated accounts make identification easier
3. Reconcile continuously: Don’t wait until month-end to find problems
4. Standardize processes: Consistent treatment across all entity pairs
5. Automate where possible: Manual eliminations don’t scale