Seeing the Group as One
When a group of companies is under common control—such as a parent company with several subsidiaries—the goal of financial consolidation is to present their financials as if they were one single economic entity. This means transactions between the entities in the group are internal, not external, and do not represent real income, expense, asset, or liability from an outsider’s perspective.
That’s where intercompany elimination comes in. It ensures the group’s consolidated financial statements reflect only dealings with parties outside the group and provide a true and fair view of financial health.
Let’s explore why this is necessary, how it works in practice, and what can happen if it’s not done properly.
What Are Intercompany Transactions?
Intercompany transactions occur between companies that are part of the same group. These can include:
- Sales and purchases of goods or services
- Loans, advances, or interest income/expense
- Dividends declared and received
- Management fees or royalty payments
- Transfers of assets between group companies
Each individual company records these transactions in its own books, often treating them just like any other third-party transaction. But in a consolidated view, these do not add value to the group as a whole—they’re simply internal movements.
Why Eliminate?
1. To Avoid Double Counting
Imagine Subsidiary A sells $100,000 of goods to Subsidiary B. If you consolidate both companies without eliminating the intercompany sale:
- The group’s revenue would be overstated by $100,000.
- The group’s cost of goods sold (COGS) would also be overstated by $100,000.
- If the inventory hasn’t been sold to an external party yet, part of the profit would be unrealised.
The result? A misleading income statement that inflates both revenue and expenses, distorting profitability.
2. To Prevent Overstated Assets and Liabilities
Suppose Subsidiary X lends $1 million to Subsidiary Y. At the entity level:
- Subsidiary X has a loan receivable of $1 million.
- Subsidiary Y has a loan payable of $1 million.
If these aren’t eliminated, the consolidated balance sheet will wrongly show $1 million more in both assets and liabilities than what the group truly owns or owes externally.
3. To Reflect External Reality
Investors, auditors, regulators, and decision-makers rely on consolidated statements to understand a group’s actual performance. Internal transactions give an inflated view of income, obligations, and financial activity. Intercompany eliminations ensure the reported results represent only what’s relevant from the outside world’s perspective.
4. To Ensure Compliance with Accounting Standards
Accounting frameworks such as IFRS and US GAAP require the elimination of intercompany balances and transactions. It’s not optional. If a group fails to do this properly, it risks:
- Audit qualifications
- Regulatory issues
- Loss of investor confidence
Real-World Example
Let’s say BrizoGroup consists of:
- Brizo Holdings (Parent)
- Brizo SG (Subsidiary in Singapore)
- Brizo AU (Subsidiary in Australia)
Brizo AU sells software licenses to Brizo SG for SGD 50,000. Brizo SG capitalises it as an intangible asset and amortises it over 3 years.
Without elimination:
- Brizo AU reports revenue of SGD 50,000.
- Brizo SG reports an increase in assets and depreciation over time.
- The group appears to have grown, even though no money came from outside.
After elimination:
- The software license sale is removed.
- The consolidated revenue does not include internal software sales.
- The group shows only external license sales as part of its top line.
When Elimination Becomes Tricky
While the concept is straightforward, practical elimination can get complicated:
Timing Differences
One entity records a transaction in March; the counterparty in April. This creates a mismatch during month-end consolidation and requires adjustment.
Currency Differences
If entities operate in different currencies, exchange rates can create rounding issues. These need to be handled carefully to avoid reconciliation errors.
Complex Structures
In tiered groups (e.g. Subsidiary C owns Subsidiary D, which owns Subsidiary E), elimination must occur at multiple levels depending on ownership and consolidation method.
Partial Ownership
If a parent owns 80% of a subsidiary, some intercompany transactions may need partial elimination, with the remaining portion attributed to non-controlling interest (NCI).
How Systems Like BrizoSystem Help
Managing intercompany eliminations manually is time-consuming and error-prone—especially for growing businesses with multiple subsidiaries. That’s why automation matters.
BrizoSystem offers features designed specifically for financial consolidation:
- Automated identification of intercompany transactions across entities
- Elimination entry support using two methods: input at group level or by selecting “from” and “to” organisations
- Ability to choose elimination method by entity, giving users flexibility
- Clear audit trails and drill-down capabilities for full visibility
BrizoSystem also helps you define a Common Chart of Accounts (CCOA) and supports currency conversion, reporting, and custom eliminations—all in one platform.
Conclusion
Eliminating intercompany transactions is not just a box-ticking exercise—it’s essential for producing consolidated financial statements that are meaningful, accurate, and compliant. It helps business leaders make informed decisions based on what’s really happening across the group, not just on paper.
With the right tools and processes in place, even complex intercompany structures can be managed efficiently, giving your business clarity, control, and credibility in its financial reporting.