Intercompany Eliminations
for Real Estate

IFRS 10 intercompany eliminations for Real Estate

Real estate groups are structured differently from most other industries. Rather than operating subsidiaries performing distinct business functions, real estate groups typically hold each property (or small portfolio) in a separate special purpose vehicle (SPV). A parent or holding company sits at the top, with dozens or even hundreds of SPVs beneath it. Joint venture structures are common because real estate development often involves co-investment with partners, pension funds, or sovereign wealth funds. Ownership percentages of 50-60% appear frequently, meaning that many entities in the consolidation are partly owned and require NCI allocation under IFRS 10.B94. IFRS 10.B86 still requires full elimination of all intragroup transactions regardless of these partial ownership stakes.

The intercompany transactions in real estate groups concentrate in four areas. First, property management fees charged by a group management company to each SPV for services like tenant management, property maintenance, and lease administration. Second, intercompany loans from the parent or a group treasury entity to fund property acquisitions and development (these are often the largest balances on each SPV's balance sheet). Third, intragroup property transfers where an SPV sells a property to another group entity (often to restructure the portfolio or to transfer a completed development from the development arm to the investment arm). Fourth, development management fees or profit shares between a development entity and the SPV that will hold the completed asset. Intragroup property transfers are the most complex elimination because if the selling entity held the property as investment property at fair value under IAS 40, there may be no "unrealised profit" in the traditional sense (the fair value is the fair value regardless of who holds it). But if the transfer occurs at a price different from the previous carrying amount, or if the property was held under the cost model, the intragroup gain requires elimination.

Audit findings in real estate group consolidations often relate to two areas. The FRC's thematic review of real estate audits identified weaknesses in how auditors assess the completeness of the intercompany population when the group has hundreds of SPVs. Auditors sometimes rely on the client's intercompany matrix without independently verifying that all SPVs with intercompany balances are included. The other common finding is inadequate elimination of intragroup property transfer gains. When a group transfers a property between SPVs, the gain or loss on transfer eliminates at consolidation, but auditors don't always recalculate the consolidated carrying amount of the property (which should reflect the original cost to the group, not the transfer price, unless fair value accounting applies). For investment properties at fair value, the intercompany transfer price should equal the independent valuation, but this needs verification.

Start by obtaining a complete SPV register with ownership percentages and intercompany balances for each entity. Verify completeness against the group's legal entity chart and the consolidation scope assessment (IFRS 10 requires consolidation of all controlled entities, including dormant SPVs with intercompany loan balances). For property management fees, confirm the fee basis (percentage of rental income, fixed fee, or cost-plus) and reconcile the amounts charged to each SPV against the management company's income. For intercompany loans, match the principal, interest rate, and accrued interest between lender and borrower at the reporting date. For intragroup property transfers, verify whether the transfer price equals the independent valuation and eliminate any gain or loss that doesn't reflect a genuine fair value movement.