Intercompany Eliminations
for Professional Services

IFRS 10 intercompany eliminations for Professional Services

Professional services groups (accounting firms, law firms, consulting practices, engineering consultancies) consolidate entities that are organised by geography, service line, or both. A typical group includes a parent or international holding entity, national practice entities in each country of operation, and possibly specialist entities for niche services. Unlike manufacturing or retail, professional services groups have almost no inventory and no physical product transfers. The intercompany transactions are service-based: staff secondments, referral fees for cross-border client introductions, shared overhead allocations, and intercompany charges for specialist expertise. The absence of physical goods means there's no unrealised profit on inventory, but unrealised profit can arise on capitalised intercompany service charges (for example, if one entity charges another for software development services that the receiving entity capitalises as an intangible asset under IAS 38).

The intercompany transactions fall into predictable categories. Staff secondment charges are the largest: when one national practice seconds a consultant or specialist to another practice for a client engagement, the sending entity charges the receiving entity a day rate that includes salary, benefits, and a margin. Referral fees compensate the entity that introduced the client when another entity delivers the engagement. Shared overhead charges from the parent or a shared services entity cover brand licensing, IT infrastructure, global HR functions, professional indemnity insurance, and quality management systems. Intercompany loans are less common than in capital-intensive industries but do arise when new offices are being established or acquisitions funded. Some professional services groups also operate through network structures where national practices are separate legal entities but share a brand and quality framework. The consolidation obligation under IFRS 10 depends on whether the parent entity actually controls the national practices (through equity, contractual arrangements, or a combination) or whether the network operates as a looser affiliation that doesn't meet the IFRS 10 control criteria.

Audit findings in professional services group consolidations tend to focus on the allocation methodology for shared overheads. The allocation basis (revenue, headcount, or a blended metric) directly affects each entity's profitability, and partners in each national practice scrutinise the allocation closely. From an audit perspective, the issue isn't the allocation method itself but rather consistency of application. If the parent charges entity A based on headcount and entity B based on revenue for the same service, the inconsistency creates matching problems at consolidation and raises questions about whether the intercompany pricing has economic substance. The FRC's practice note on group audits (PN 20) reminds auditors to assess whether related party transactions (including intercompany transactions) are conducted on terms that could distort the financial position of individual group entities, even though the transactions eliminate at consolidated level.

Map all intercompany arrangements from the group's service agreements and management contracts. For staff secondments, verify that the sending and receiving entities recorded the same number of days at the same rate. For referral fees, confirm the fee percentage, the revenue base it applies to, and the period covered. For shared overhead allocations, obtain the allocation model and verify that it was applied consistently across all entities and periods. Where a national practice has capitalised any intercompany service charge as an intangible asset (common for internally developed software or training programmes), check for embedded intercompany margin and eliminate it from the capitalised amount. Recalculate amortisation on the adjusted cost for the current and prior periods.