What is Intercompany Elimination?
Intercompany elimination is the process of removing transactions, balances and unrealized profits between entities in the same group from the consolidated financial statements. The goal is to present the group as a single economic entity to external users.
How It Works
- Identify all intercompany sales, purchases, receivables, payables, loans and dividends.
- Eliminate matching items on both sides of the transaction.
- Defer any unrealized profit in remaining inventory or fixed assets until realized externally.
- Reverse the elimination when the underlying asset is sold outside the group.
Saudi Context
Saudi groups with manufacturing and distribution subsidiaries must eliminate intercompany sales carefully, especially when goods remain in stock at period end and carry unrealized profit.
Example
Parent sells SAR 1 million of goods to subsidiary at a SAR 200,000 profit. If subsidiary still holds 50 percent of those goods at year-end, the worksheet eliminates the SAR 1 million revenue and defers SAR 100,000 of unrealized profit.