Definition
Intercompany elimination is the consolidation step that removes transactions and balances between companies in the same group, so group figures show only dealings with outside parties.
What is intercompany elimination used for?
If a parent sells USD 500,000 of goods to its subsidiary, the group hasn’t earned anything from outsiders. Without elimination, group revenue, receivables and payables would all be overstated. Eliminations remove intercompany sales and purchases, receivables and payables, and any unrealised profit on stock the buyer still holds.
Example: the parent shows USD 500,000 receivable from the subsidiary and the subsidiary shows the same amount payable; both are eliminated on consolidation.
Eliminations only work cleanly when both sides record matching amounts, so mismatches have to be investigated before the group closes.