What are intercompany eliminations?
Intercompany elimination is the process that a parent company goes through in order to remove transactions between subsidiary companies in a group. Parent companies complete intercompany eliminations when they’re preparing consolidated financial statements.
Why are intercompany eliminations important?
Intercompany eliminations show financial results without transactions between subsidiaries.
Essentially, intercompany elimination ensures that there are only third party transactions represented in consolidated financial statements. This way, no payments, receivables, profits or losses are recognised in the consolidated financial statements until they are realized through a transaction with a third party.
Intercompany eliminations are easy to miss.
So that no intercompany transactions slip through the cracks, companies must put controls in place. Software can help companies flag intercompany transactions. The best corporate performance management software equips Finance teams with a hub to eliminate and reconcile intercompany transactions.
How do intercompany eliminations work?
Just like your ERP, your consolidation system should have two sides. This is referred to as double entry logic. Double entry logic in the consolidation process eliminates the possibility of one-sided entries, which could compromise your financial statements down the line.
Double entry logic, for instance, can help intercompany eliminations in the case of an offsetting transaction by the counterpart so that your consolidation system reverses the entry to zero effect.
There are three types of intercompany eliminations:
- Intercompany debt: eliminates loans made between subsidiaries
- Intercompany revenue and expenses: eliminates sales between subsidiaries
- Intercompany stock ownership: eliminates ownership interest of the parent company in its subsidiaries.
How to improve intercompany eliminations.
- Equip all subsidiaries and LoBS with a single system for consolidation, company-wide.
- Deploy a consolidation system that has double entry logic.
- Use a centralized cockpit to manage intercompany eliminations.