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.