Consolidation rests on a legal — economic fiction: the group is a single entity. A single entity cannot sell to itself, owe itself money or pay itself dividends — so all intercompany transactions must be eliminated from the consolidated financial statements under IFRS 10 (mirrored in Vietnam’s consolidation regime in Circular 202/2014/TT-BTC). This article lists exactly which groups are eliminated and the reconciliation discipline that decides whether the elimination is right.
Which intercompany transactions must be eliminated?
Four main groups. (1) Intercompany sales of goods and services: the revenue and corresponding cost of sales of intra-group sales are eliminated in full — otherwise consolidated revenue is “inflated” by trading with oneself. (2) Intercompany balances: trade receivables — payables between group units, intercompany loan balances and the corresponding interest, and declared-but-unpaid dividends — all eliminated on both sides after reconciliation agrees. (3) The parent’s investment in the subsidiary is eliminated against the subsidiary’s equity at the acquisition date, with the difference recognised under business combination mechanics (goodwill or a bargain purchase gain) — the most foundational consolidation entry. (4) Internal dividends: dividend income the parent records from the subsidiary is eliminated against the subsidiary’s corresponding distribution, because in consolidated eyes it is merely cash moving within one pocket. Smaller items frequently forgotten: internal management and royalty fees (eliminate revenue — expense on both sides), gains on intra-group fixed asset transfers (eliminate the margin and restate consolidated depreciation to the original basis), and allowances on intercompany receivables (an allowance booked by the holder must be reversed on consolidation because the “external” debt does not exist).
How is unrealised profit in intercompany inventory handled?
This is the most delicate elimination. When the parent (or one subsidiary) sells goods to another subsidiary at a gross profit, the portion not yet sold outside the group at the reporting date still carries that “profit” inside inventory value. In the consolidated statements, inventory must return to cost-to-the-group, the unrealised profit is eliminated from both inventory and the period’s consolidated profit, and the deferred tax effect is recognised because the tax base of the inventory at the holding unit does not change. In the next period, when those goods are sold to external customers, the previously eliminated profit is “released” back into consolidated results. Two variants need their own procedures: downstream transactions (parent sells to subsidiary) and upstream ones (subsidiary sells to parent or to another subsidiary), because for upstream sales the eliminated profit must also be allocated between the parent’s shareholders and non-controlling interests; and intra-group fixed asset transfers, where the “unrealised profit” is released gradually over the remaining depreciation period instead of at once.
Reconciliation before elimination: the step that cannot be skipped
The short answer: yes, professionally mandatory — elimination is a two-sided entry and is only right when both sides agree. Before the consolidation, group units must reconcile by counterparty: balances, sales — purchases, interest, dividends. Reconciliation differences usually arise from: timing differences (goods in transit, cash in transit, invoices not yet received), exchange differences where the two sides book in different currencies, and genuine errors. The correct discipline: differences must be explained and adjusted in the books of the unit in error before elimination entries are posted; never “plug” a difference with a suspense entry at consolidation level, because that plug rolls into the next period and swells into an unexplained material error. This is also why topic FDI-LC-2068 stresses monthly intercompany reconciliation: compressing twelve months of reconciliation into the consolidation week is the most common cause of consolidation delays. Elimination errors — missed transactions, double elimination, eliminating on unreconciled figures — directly misstate consolidated revenue, profit, assets and liabilities; if material and discovered after issuance, the group must restate retrospectively under the error standard (IAS 8, mirrored by VAS 29) with audit and reputational consequences, not to mention loan covenants computed on the wrong consolidated numbers may have been silently breached.
Frequently asked questions
Which intercompany transactions must be eliminated on consolidation?
Four groups: (1) revenue — cost of intercompany sales of goods and services; (2) intercompany balances — receivables/payables, loans and interest, unpaid dividends; (3) the parent’s investment eliminated against the subsidiary’s acquisition-date equity; (4) internal dividends. Plus internal fees, fixed asset transfer gains and intercompany receivable allowances to reverse.
How is unrealised profit in intercompany inventory handled?
For goods not yet sold outside the group at the reporting date: eliminate the gross profit from inventory value and consolidated profit, recognise the deferred tax effect; release it back when the goods are sold externally in a later period. Upstream sales also allocate the effect to non-controlling interests.
Must parent — subsidiary balances be reconciled before elimination?
Yes — counterparty-by-counterparty reconciliation (balances, sales — purchases, interest, dividends) is the condition for correct elimination. Differences from timing, exchange rates or errors must be explained and fixed in the unit’s books first; never plug them at consolidation level.
What is the effect of elimination errors on the statements?
They misstate consolidated revenue, profit, assets and liabilities (usually inflating them through double counting). Material errors found after issuance require retrospective restatement under IAS 8/VAS 29, with audit and reputational consequences and covenant breach risk.
This article has been quality-reviewed by the FLAW AI Legal Council
