Intercompany eliminations, compared pair by pair every month
Intercompany elimination removes what group companies owe, earn and charge each other, so the group accounts show only dealings with the outside world. Finconsol compares each pair of companies at account level every month and eliminates the smaller side by default, through an entry in the group accounts, apart from the companies' books.
Compared pair by pair
Each company's balance against the other's, USD thousands.
Two intercompany pairs. Zenvara Technologies fees from Zenvara Inc. of 420 agree with Zenvara Inc. fees to Zenvara Technologies of 420, so 420 is eliminated. Zenvara Technologies' loan to Zenvara FZ-LLC of 1,200 differs by 20 from the 1,180 FZ-LLC holds, so the smaller side, 1,180, is eliminated and 20 is left on the list.
The group is not trading with itself
Zenvara Technologies in India charges Zenvara Inc. in the US 420 thousand dollars in fees. Technologies books 420 of revenue. Inc. books 420 of cost. Each company is right on its own.
Add the five companies together and revenue is 6,376 and costs are 5,360. No outsider paid or earned that 420. The group's real revenue is 5,956 and its costs are 4,940. Profit is the same either way, which is why the error is easy to miss.
- Revenue and costs are inflated. Margins and revenue per employee look better or worse than they are.
- Assets and liabilities are inflated. Loans and balances between companies appear as if outsiders owed them.
- The two sides rarely agree. Timing, currency and a missed invoice leave a difference between what one company holds and what the other holds.
- Forcing it to zero hides the problem. A plug that makes the elimination balance leaves an unexplained figure in the group accounts.
How it is done today and where it breaks
Most groups find the intercompany balances by hand at month end, key the entries into a worksheet and hope both sides were captured.
| By hand in a spreadsheet | Finconsol | |
|---|---|---|
| Finding the pairs | Someone lists the intercompany accounts each month | Each pair of companies is compared at account level every month |
| A difference | Buried in a plug line or fixed quietly | Shown, and left on the list until resolved |
| The entry | Typed by the same person who found it | An entry in Finconsol, apart from the books |
| Last month's work | Rebuilt or copied forward | Kept, with what changed and when |
How Finconsol handles intercompany
Compare, pair by pair
For each pair of companies, Finconsol compares what one holds against the other at account level, every month. Zenvara Technologies' fees receivable against Zenvara Inc.'s fees payable is one pair.
Eliminate the smaller side by default
The smaller side is the amount both companies agree on, so that is the amount removed. The elimination is an entry in the group accounts, never in a company's books.
Recorded and locked
Each elimination is recorded in the change log. Once the month is locked, the eliminations cannot be changed.
What is left stays visible
Whatever is not eliminated stays in the statements and on the intercompany list until it is resolved. Nobody has to hunt for it, and nobody can lose it.
Fees, loans and investments
The three most common intercompany items, and what happens to each in the group accounts.
| Item | One company shows | The other shows | In the group accounts |
|---|---|---|---|
| Fees | Revenue, such as Zenvara Technologies' 420 of fees | The same amount as cost, as in Zenvara Inc. | Removed from both: group revenue and costs each fall by 420, and profit does not change |
| Loans | Loan receivable, and interest income | Loan payable, and interest expense | The balances and the interest are removed, because the group cannot lend to itself |
| Investments | The parent's investment in a subsidiary | The subsidiary's share capital and reserves | Removed against the subsidiary's equity, with minority interest worked out for partly owned companies |
In the example group, the 420 of fees is 35,070 thousand rupees in Zenvara Technologies and 420 thousand dollars in the group statements, with Zenvara Inc. showing the other side as a cost of (420).
What you get
- An intercompany list for every month, pair by pair, with what each side holds and what is left over.
- Elimination entries kept in Finconsol and recorded in the change log, each with its time.
- Group statements without double counting: balance sheet, profit and loss and cash flow after intercompany.
- A consolidation worksheet with the eliminations in their own columns, tied to the statements.
- Drill-down from group revenue to the companies, with intercompany removed, and then to the accounts behind each figure.
Good to know
- The smaller side is eliminated by default. A leftover difference is not forced to zero, so it stays in the statements until it is explained, corrected in a company or adjusted.
- Eliminations are entries in Finconsol. The companies' books are only read, so they never change.
- The comparison is only as good as the mapping. Each company's intercompany accounts are mapped once to the group chart, and a new account that is not mapped stops the month.
- For worked entries and the reasoning behind each one, read intercompany eliminations explained.
Questions
How do you eliminate intercompany transactions?
What is an intercompany loan elimination?
Why is the smaller side eliminated?
What happens when the two sides do not match?
Does this change the companies' books?
Can companies on different accounting systems be compared?
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