Intercompany Transactions & Balances

This piece is the third instalment in our series on automating financial consolidation. Links to the previous articles – Group Structure and Chart of Accounts – can be found on our website.

Eliminating intercompany transactions and balances (IC) is a core consolidation step. IFRS 10 requires that all such assets, liabilities, equity, income, expenses and cash-flows be eliminated in full before the consolidated statements are issued. The only strategic question is where the work of resolving breaks happens – inside each subsidiary or centrally at head office.

Two organizational models

Model	How it works	Best for
Reconciliation	Subsidiaries send head office finished reports: each entity works with its counterparties until the IC difference hits zero; HO simply uploads the final numbers.	Small groups; few entities; tight local processes.
Matching	The consolidation system becomes a shared workspace: HO sees breaks in real time, tracks causes and – if needed – nudges subsidiaries to agree corrections (for large groups this sometimes involves litigation). The IC module therefore needs richer features: counterparty cards, drill-downs and comment threads.	Mid- to large groups; cross-border trades; high audit scrutiny.

A group picks its model while drafting the consolidation methodology; once chosen, it’s far simpler to embed it directly in the system than to juggle it in spreadsheets.

Chart-of-accounts set-up

Create dedicated IC accounts – as many as needed (per entity or sub-group). Modelling accounts in pairs lets you see the total break at a glance: one figure for the balance sheet, another for the profit-or-loss.

The automatic elimination journal zeros those IC accounts. Any temporary difference is parked in a suspense account so that finance can investigate – but that suspense must clear to zero before sign-off.

Example – Eliminating IC between Company A and Company B

	Company A	Company B	Auto-adj. in A	Auto-adj. in B	Group total
IC receivable	100	—	(100)	—	0
IC payable	—	(120)	—	120	0
Suspense receivable	—	—	—	(20)	(20)
Special offset (consol.)	—	—	100	(100)	0

Once subsidiaries agree the correcting journal, the CU 20 suspense is reversed, bringing the group total back to zero.

Dividends & unrealized profits on intra-group sales

When you automate IC dividends, make sure the logic doesn’t create unwanted effects on unrealized profits. In practice groups follow one of three approaches:

Manual journals prepared by consolidation staff.
System-driven allocation of the break amount to special balance-sheet accounts.
Margin split: if the gross margin for each SKU is known, the system can calculate the UP impact automatically.

Why the effort pays off

A centralised IC workflow delivers faster closes and higher data quality by giving the group a single, end-to-end entry point for intercompany operations. For many finance teams that single gain justifies the entire automation project.

July 3 at 12:30 PM

Join our free webinar on "Key Considerations in Automating Financial Consolidation" to explore how to:

Structure your group and chart of accounts effectively

Handle data collection and multi-currency challenges

Automate intercompany eliminations, adjustments, and cash flow reporting

Set the right level of analytics and detail in your system

Register now

Authors

Evgeny Rudakov Partner

Maxim Andreev Director