Intercompany Eliminations
for Logistics

IFRS 10 intercompany eliminations for Logistics

Logistics groups generate intercompany transactions every time a shipment crosses an internal boundary between group entities. A parcel or freight consignment that moves from the Netherlands to Germany to Poland may pass through three group entities, each recording intercompany revenue from the next entity in the chain (or the previous one, depending on the billing model). The total intercompany revenue in a logistics group can exceed external revenue because the same consignment is invoiced multiple times as it moves through the network. IFRS 10.B86 requires all of this to eliminate at consolidation, leaving only the revenue charged to the external customer and the group's actual operating costs.

Logistics groups structure themselves either geographically (one entity per country or region) or functionally (separate entities for road freight, air freight, sea freight, warehousing, and customs brokerage). Many mid-market logistics groups use both, with country entities handling local operations and functional entities providing specialist services across borders. The intercompany transaction types include linehaul charges between country entities for trunk movements, handling fees charged by warehouse entities for receiving, storing, and dispatching goods, customs brokerage fees, fleet recharges from a central fleet entity to operating entities, and management fees from the parent. The billing model matters for elimination purposes: some logistics groups use a "revenue share" model where the origin entity invoices the external customer and pays the destination entity a handling fee, while others use a "cost-plus" model where each entity in the chain invoices the next at cost plus a margin. The cost-plus model creates larger intercompany balances and more complex elimination.

Two issues dominate logistics intercompany audits. First, the volume of intercompany invoices is high (potentially thousands per day in a busy network), and matching individual transactions between entities is impractical. Logistics groups typically reconcile intercompany balances at a monthly aggregate level, but rounding, timing differences on consignments in transit at month-end, and disputed charges create persistent reconciling items. These reconciling items accumulate and can become material in aggregate. The AFM noted in its 2021 public report on audit quality that group auditors sometimes fail to aggregate intercompany differences across all entity pairs when assessing materiality. Second, foreign currency intercompany balances are common because logistics groups operate across multiple currency zones. The same shipment may generate a euro-denominated intercompany charge in the origin entity and a zloty-denominated charge in the destination entity, with the exchange rate difference creating a mismatch that only partly explains the reconciling item.

For logistics groups, don't attempt invoice-level matching. Request the monthly intercompany settlement reports from the group's transport management system (TMS). Reconcile at the monthly entity-pair level, with a variance threshold proportionate to the volume (for example, any monthly variance exceeding 1% of that pair's monthly intercompany activity). For fleet recharges, verify the rate per vehicle-day or per kilometre against the fleet entity's actual costs to determine the margin. For foreign currency intercompany balances, translate using the closing rate for balance sheet items and the average rate for income statement items per IAS 21.39, and calculate the translation difference separately from the operational reconciling items. This prevents you from chasing exchange rate effects as if they were transaction mismatches.