Intercompany Eliminations
for Energy & Utilities

IFRS 10 intercompany eliminations for Energy & Utilities

Energy and utilities groups combine generation, transmission, distribution, and retail supply entities within a single consolidated group. The physical flow of energy through the value chain mirrors the financial flow of intercompany transactions: a generation subsidiary sells power to a trading entity, the trading entity sells to a retail supply entity, and the retail entity sells to end consumers. Each internal sale generates revenue, cost of sales, and a margin that requires elimination under IFRS 10.B86. The volumes are substantial (a single generation-to-trading transaction can represent millions of megawatt-hours per year at fluctuating market prices), and the commodity nature of the product means that matching intercompany quantities and values requires access to energy trading systems rather than standard accounting records.

Energy groups typically include a holding company, generation entities (often one per power station or renewable asset portfolio), a central trading or hedging entity, network or infrastructure entities (regulated separately in most jurisdictions), and retail supply entities. Joint ventures are common in generation, particularly for offshore wind farms, nuclear plants, and large solar installations where the capital requirement exceeds a single company's risk appetite. Ownership at 50-75% is standard for generation JVs. The intercompany transaction types include power purchase agreements between generation and trading entities, fuel supply contracts between a group fuel procurement entity and generation subsidiaries, network access charges paid by retail supply entities to the regulated network entity, management service charges, intercompany loans funding capital-intensive generation and network assets, and intercompany hedging arrangements where the trading entity provides commodity derivatives to other group entities. These hedging arrangements create the same fair value matching issues as intercompany derivatives in banking groups.

Two recurring audit findings affect energy groups. First, intercompany power sales at transfer prices that don't match the market price at the time of delivery. Energy transfer pricing is complicated because wholesale power prices change every half-hour in many markets, and the intercompany price may be set using a different reference period than the market settlement price. Auditors must understand the pricing mechanism in the intercompany power purchase agreement and verify that both entities applied it consistently. Second, intercompany hedging arrangements where one entity's gain doesn't perfectly offset the other entity's loss due to timing differences in the recognition of derivative fair value changes. The FRC has noted in its energy sector reviews that auditors sometimes accept the client's assertion that intercompany hedges "net out" without independently verifying the fair values on both sides.

Request the intercompany trading schedule from the group's energy trading and risk management system (ETRM), not just the financial accounts. The ETRM data will show volumes, prices, and delivery periods for all intercompany transactions. Reconcile the physical volumes first (did the generation entity deliver the same MWh that the trading entity recorded receiving?), then match the financial values. For intercompany hedging, obtain the mark-to-market valuations from both counterparties and verify they used consistent market data. For network access charges in regulated entities, verify the intercompany charge against the regulator's allowed revenue calculation. Eliminate all matched balances and investigate any residuals above your investigation threshold.