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Reconciling and eliminating intercompany transactions
Under IFRS consolidation procedures, the following objects are excluded from financial statement preparation: intercompany assets and liabilities, subsidiary equity, income, expenses, and cash flows associated with transactions between group companies.
Intercompany transaction reconciliation is a procedure of comparing data of the same transactions within a group provided by different business units.
Intercompany transactions are transactions between companies included in a "group" (between a parent company and its subsidiaries) and transactions between subsidiaries.
Profit or losses that arise from intercompany transactions and recognized as assets, such as inventory and fixed assets, are eliminated in full. Further, we use the term "unrealized gains/losses", which are the markup/markdown remaining from unrealized inventory in the customer's balance during the sale of inventory between group companies.
Unrealized gains (losses) are gains (losses) from intercompany sales which is not considered as unrealized by the group as there are no sales of the corresponding assets outside the group.
Before eliminating intercompany transactions, reconcile intercompany balance and turnovers between group companies and settle the existing discrepancies.
After settlement and elimination, the source data does not change. Financial statement adjustments are recorded in the Transformational adjustment documents.
Reconciling intercompany transactions
To prepare consolidated financial statements of a group in accordance with IFRS, reconcile intercompany transactions.
You can reconcile intercompany transactions in two ways:
- Reconcile balance on AR/AP accounting between group companies.
- Reconcile turnovers on AR/AP accounting for the reporting period.
To set up reconciliation sections, edit the "Reconciliation template".
The standard settings involve intercompany transactions reconciliation in the following sections:
- Balance on financial assets / balance on credits, loans, and promissory bills received.
- Accounts receivable / accounts payable.
- Service sales / purchase (turnovers).
- Inventory sales / purchase (turnovers).
- Non-current asset sales / purchase (turnovers).
- Dividend income / declared dividends.
You can also divide these sections based on transaction types, for example: credit and loan balance/interest, accounts receivable/accrued dividends, services for the core line of business, construction services, and so on.
Each section has its own reconciliation dimension and elimination methods.
For example, accounts receivable and payable are reconciled broken down by counterparties. Contracts are used as an additional dimension for elimination. On elimination, accounts receivable balance is eliminated against accounts payable balance.
Revenue from service sales and service cost are reconciled broken down by counterparties and sales kind (product groups). Cost items are used as an additional dimension for elimination. On elimination, sales turnovers are eliminated (reversed) against turnovers at cost (purchases).
The revenue from inventory sales of the seller company is reconciled with the purchase turnovers of the customer company. After that, the unrealized gains in inventory are eliminated at the "Standard margin" or "Reported cost". Counterparties and sales kinds (product groups) are used as a dimension for reconciliation.
As a result of the intercompany transactions reconciliation, discrepancies are identified and settled. Minor discrepancies can be settled automatically.
Elimination
Eliminate balance, turnovers, and unrealized gains in full for all internal payments between subsidiaries and payments between subsidiaries and the parent company.
Intercompany transaction elimination is an exclusion of the intercompany transaction results that should not be included in the reporting of the group considered as a single company. For example, mutual debt, profit resulting from intercompany sales, mutual payments, and so on.
Intercompany transaction settlement is identification of the reasons for the existing discrepancies in the data provided by different participants of the same intercompany transactions and making the necessary adjustments to the reporting data to eliminate these discrepancies.
Once intercompany transactions are reconciled, balance, turnovers, and unrealized gains are eliminated. The procedure is performed at the level of the eliminating company included in the consolidation perimeter. Perform elimination in the group's functional currency. Data for eliminating entries is automatically transferred when filling the elimination document. Eliminating entries are reversing when they are made in correspondence with the technical account for each amount of balance or turnovers to eliminate.
Specify the technical account in the "Reconciliation template". It can be either balance or off-balance. When an off-balance account is used as a technical account, transfer its balance caused by discrepancies in intercompany payments to balance accounts using manual transformational adjustments.
Group the elimination sections based on the sections used for reconciliation. There are the following main types of eliminating adjustments based on the reconciliation sections:
- Elimination of intercompany debt and financial assets/loans:
Dr/Cr "Balance GL account for balance".
Cr/Dr 7.2.00.00.04 "Adjustment accounts: intercompany transactions elimination".
The entry eliminates the closing balance of AR/AP accounts.
- Elimination of intercompany turnovers for services excludes revenue from rendered intercompany services and cost of purchased intercompany services:
Dr/Cr "Income account".
Cr/Dr "Expense account".
The entry is made at the level of the eliminating company. It also reverses the income in the amount recorded in the seller company and reverses the expense in the amount recorded in the customer company.
- Elimination of intercompany inventory sales:
Dr "GL account of inventory sales cost".
Cr "GL account of revenue from inventory sales".
These entries eliminate/collapse the seller's cost and revenue by reversing. The remaining revenue is excluded as unrealized gains or losses against inventory account balance.
Elimination of unrealized gains/losses in the customer's inventory account balance on unsold inventory:
Dr/Cr "GL account of revenue from inventory sales".
Cr/Dr "Customer's inventory GL account".
- Elimination of intercompany dividend turnovers excludes declared dividends in equity against dividend income from a shareholder:
Dr/Cr "Retained profit account (dividends)".
Cr/Dr "Income account (dividends)".
The entry is made at the level of the eliminating company. It also reverses the dividend income in the amount recorded in the shareholder company and reverses part of the retained profit in the amount recorded in the company that declared the dividends.