Key Points
- Every intragroup balance, transaction, and unrealised profit must be eliminated in full on consolidation, regardless of the ownership percentage in the subsidiary.
- Incomplete elimination is one of the most common consolidation errors, particularly for intercompany loans, management fees, and inventory margins.
- Unrealised profits on intragroup inventory sales are eliminated against the selling entity's margin; the tax effect creates a deferred tax adjustment under IAS 12.
- Groups with more than ten entities routinely carry intercompany mismatches exceeding 1% of total revenue before reconciliation.
What is Intercompany Elimination?
IFRS 10.B86 requires the parent to eliminate in full all intragroup assets, liabilities, equity, income, expenses, and cash flows relating to transactions between entities within the group. The objective is simple: the consolidated financial statements must show only transactions with parties outside the group. If a subsidiary sells goods to another subsidiary for EUR 5M, that sale and the corresponding purchase disappear on consolidation. The inventory remains, but only at its original cost to the group (not the transfer price). Any margin embedded in unsold inventory at the reporting date is an unrealised profit that IFRS 10.B86(c) requires the group to eliminate.
The process extends beyond revenue and cost of sales. Intercompany loans, interest charges, dividends, management fees, and receivable-payable balances all require matching and elimination. ISA 600.40(b) expects the group engagement team to evaluate whether consolidation adjustments are complete and appropriate. In practice, the audit work centres on whether management has a functioning intercompany reconciliation process and whether all mismatches have been investigated before the elimination entries are posted.
Worked example: Henriksen Shipping A/S
Client: Danish maritime logistics company, FY2025, revenue EUR 140M, IFRS reporter. Henriksen owns 100% of Henriksen Chartering B.V. (Netherlands, revenue EUR 32M) and 80% of Henriksen Port Services GmbH (Germany, revenue EUR 18M). The group engagement team must verify the intercompany eliminations at 31 December 2025.
Step 1 — Identify all intragroup transactions and balances
Henriksen Chartering invoiced the parent EUR 6.2M for vessel charter services during FY2025. Henriksen Port Services invoiced the parent EUR 2.8M for port handling fees. The parent charged both subsidiaries a combined management fee of EUR 1.5M. At year-end, the parent's books show a receivable from Henriksen Chartering of EUR 1.1M, while Henriksen Chartering records a payable to the parent of EUR 1.1M. The parent also holds a EUR 4M intercompany loan to Henriksen Port Services at 4.5% interest, generating EUR 180K of interest income.
Step 2 — Eliminate reciprocal balances
The EUR 1.1M receivable on the parent's balance sheet and the EUR 1.1M payable on Henriksen Chartering's balance sheet cancel. The EUR 4M intercompany loan receivable on the parent's books and the corresponding liability on Henriksen Port Services' books cancel. Any accrued interest (EUR 180K income on the parent, EUR 180K expense on the subsidiary) also cancels.
Step 3 — Eliminate intragroup income and expenses
The EUR 6.2M charter revenue on Henriksen Chartering's income statement and the EUR 6.2M charter expense on the parent's income statement cancel. The same applies to the EUR 2.8M port handling fees and the EUR 1.5M management fee. Total eliminated revenue is EUR 10.5M.
Step 4 — Eliminate unrealised profit in inventory
Henriksen Chartering sold spare marine parts to Henriksen Port Services for EUR 800K during Q4 2025. Henriksen Chartering's cost was EUR 600K, producing a EUR 200K margin. At 31 December, Henriksen Port Services still holds EUR 500K of these parts in inventory (proportionate cost to the group: EUR 375K). The unrealised profit on unsold inventory is EUR 125K (EUR 500K minus EUR 375K). This amount is eliminated against consolidated inventory and consolidated profit. The tax effect at the German corporate tax rate of 30% creates a deferred tax asset of EUR 37.5K under IAS 12.
Conclusion: the group eliminates EUR 10.5M of intercompany revenue and expenses, EUR 5.1M of reciprocal balances, and EUR 125K of unrealised inventory profit (with a EUR 37.5K deferred tax asset), producing consolidated statements that reflect only external transactions.
Why it matters in practice
The most frequent consolidation deficiency flagged in practice is an incomplete intercompany reconciliation. When subsidiary ledgers record intragroup transactions in different periods (one entity books the revenue in December, the counterparty books the expense in January), the amounts do not match at the reporting date. IFRS 10.B86 requires full elimination; partial elimination due to timing mismatches distorts both revenue and profit. ISA 600.40(b) requires the group engagement team to evaluate whether the consolidation process addresses such timing differences before posting the elimination entries.
Teams frequently eliminate intercompany revenue and expenses but overlook the unrealised profit on inventory or fixed assets transferred within the group. IFRS 10.B86(c) explicitly requires elimination of profits and losses resulting from intragroup transactions recognised in assets such as inventory or property, plant and equipment. Missing the unrealised profit on a single large intragroup asset transfer can produce a material overstatement of both consolidated assets and consolidated equity.
Intercompany elimination vs. consolidation adjustment
| Dimension | Intercompany elimination | Consolidation adjustment |
|---|---|---|
| Purpose | Removes transactions and balances between group entities so the group appears as a single entity | Broader category: includes intercompany eliminations plus adjustments for fair value allocation, goodwill, NCI measurement, and accounting policy alignment |
| Scope | Only intragroup items: reciprocal balances, intragroup revenue and expenses, unrealised profits | All entries needed to convert individual entity statements into consolidated statements |
| Recurring vs. one-time | Recurring every period as long as intragroup transactions occur | Some are recurring (intercompany eliminations, NCI allocation), others arise only at acquisition (purchase price allocation) |
| Typical audit focus | Completeness of the intercompany reconciliation, matching of both sides, unrealised profit on inventory or fixed assets | All of the above plus the carrying amount of goodwill, fair value of identifiable net assets, and consistency of accounting policies across components |
The distinction matters because practitioners sometimes treat the terms as synonyms. A clean intercompany elimination schedule does not mean the consolidation is complete. The auditor still needs to evaluate the non-elimination adjustments (goodwill impairment testing, NCI measurement, policy alignment) separately under ISA 600.
Related terms
Frequently asked questions
Do I need to eliminate intercompany transactions with a partly owned subsidiary?
Yes. IFRS 10.B86 requires full elimination of intragroup transactions regardless of the non-controlling interest percentage. The NCI share of the subsidiary's profit is calculated after the elimination, not before. If a parent owns 60% of a subsidiary and the group eliminates an unrealised profit on a downstream sale, the full unrealised amount is removed from consolidated profit. IFRS 10.B94 then allocates the adjusted profit between the parent and NCI.
How do I audit intercompany eliminations on a group engagement?
Obtain management's intercompany reconciliation schedule and test it for completeness. ISA 600.40(b) requires the group engagement team to evaluate the appropriateness of consolidation adjustments. Confirm that both sides of each transaction agree, investigate mismatches above a threshold linked to component materiality, and verify that unrealised profits on intragroup asset transfers have been identified and eliminated. Test a sample of elimination journal entries back to supporting invoices and ledger balances.
What happens if intercompany balances do not match at year-end?
The group must investigate and resolve the mismatch before posting the elimination. Common causes include timing differences on intercompany invoices, foreign currency translation variances on intragroup balances denominated in different currencies, and unrecorded transactions on one side. IFRS 10.B86 does not permit leaving the difference unadjusted. If the mismatch is immaterial, the group typically posts a rounding adjustment; if material, it indicates an error in one or both sets of books that the auditor must pursue under ISA 450.