Intercompany Eliminations
for Healthcare

IFRS 10 intercompany eliminations for Healthcare

Healthcare groups encompass a wide range of structures, from hospital networks with shared procurement to pharmaceutical companies with research, manufacturing, and distribution arms. The intercompany transactions reflect this diversity. A hospital group will have centralised procurement entities buying medical supplies and pharmaceuticals at volume discounts, then distributing to individual hospital entities at a markup. A pharmaceutical group routes IP through holding structures, charges royalties to manufacturing entities, and transfers finished product to distribution companies. Both models create intercompany balances, unrealised profit, and elimination requirements under IFRS 10.B86 that the auditor must address.

Hospital and clinical care groups typically operate through a parent entity that owns multiple facility-operating subsidiaries, a shared services entity providing finance, HR, and IT, and sometimes a separate property entity that owns the real estate and leases it to the operating entities. The intercompany transactions are procurement markups on medical supplies and pharmaceuticals, management fees for shared corporate functions, intercompany lease payments for clinical facilities, and occasionally intercompany transfers of medical equipment between sites. Pharmaceutical groups add IP licensing, contract manufacturing at transfer prices, and R&D cost recharges to this mix. Ownership structures vary more than in some other industries because healthcare groups often acquire facilities through joint ventures with local partners, medical professionals, or government entities. Minority interests at 15-49% are common in facility-level entities, making NCI calculations under IFRS 10.B94 a regular feature of the consolidation.

Two audit issues dominate healthcare intercompany work. First, shared service allocations are often based on activity drivers (patient numbers, bed-days, FTE counts) that change during the year, creating differences between the budgeted allocation used for monthly intercompany invoicing and the actual allocation at year end. The "true-up" adjustment at year end is a common source of intercompany mismatches. Auditors should verify that both entities (the shared service provider and the receiving hospital) have recorded the same true-up amount. Second, pharmaceutical groups that transfer product between manufacturing and distribution entities at transfer prices set for tax purposes may have margins that don't reflect the actual value added at each stage. The PCAOB's 2022 staff report on group audits noted that auditors sometimes fail to assess whether transfer pricing adjustments have been consistently applied across all affected entities in the consolidation.

For healthcare groups, begin by mapping the intercompany arrangements by type: procurement, services, leases, IP. Request the allocation methodology for shared services and verify the year-end true-up calculation. For pharmaceutical product transfers, obtain the transfer pricing study and calculate the unrealised profit in closing inventory using the methodology described in the manufacturing industry guidance above. For intercompany leases on clinical facilities, apply the IFRS 16 elimination approach (remove ROU asset and lease liability, reinstate the underlying property). Where minority interests exist at facility level, allocate the NCI share of all elimination adjustments per IFRS 10.B94.