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Group consolidation: Intercompany Elimination

  • 19 November 2021
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Hi,

Please refer to the consolidation structure below.

  • The Consolidation Structure I

           Consolidation Method: Equity Majority & Equity Minority

 

 

The Elimination rule was not picked up when we ran the consolidation for a month. As a result, there are unclear balances in the intercompany accounts.

 

However, if the structure has used the consolidation method "Equity Majority” only, the elimination rule will be applied. Please see the screen prints below for more information.

 

  • The Consolidation Structure II

 

 

Could you please explain why the elimination rule wasn't being picked up when the structure has used the Consolidation Method including both Equity Majority and Equity Minority (In the Structure I)?

 

Thanks in advance!

Best Regards,

Yoshini

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Best answer by Gayathrie Thiruvalluvar 25 November 2021, 12:20

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Hi Yoshini,

 

I did a quick analysis on the above query and the following are my thoughts.

 

Intercompany elimination usually relates to the activity of a parent company removing transactions that happened between subsidiary companies in a group.

It seems in your structure there are only 2 entities.

  • EHT1 is using Equity Majority and in consolidation terms it can be considered as a subsidiary.
  • EHT2 is using Equity Minority and in consolidation terms it can be considered as an associate.

Accordingly, the transactions have happened between a subsidiary [EHT1], which your group has majority ownership and control, and another company [EHT2], that your group does not have majority ownership and control, but have invested some money or assets in.

These transactions would be considered as happened between a company in your group of companies [EHT1] and a third party company [EHT2]. EHT2 is considered third party, since, as mentioned above, your group has only invested in that company but do not yet own or control it.

 

In other words, the transactions are not considered as inter-company and in this situation these transactions do not get captured under intercompany elimination rules.

 

If there is any specific expectation for the Intercompany elimination to happen even when EHT2 is setup with equity minority, then it would be better to revisit the structure and discuss with the users who setup the structures.

It could be that even with 49%, the group is having a controlling stake of EHT2. Then the correct approach would be to set the consolidation method as equity majority. [Note this would have an overall impact on consolidation figures. Therefore, this should be done considering the actual ownership situation]

 

You may also seek RnD opinion for further confirmations.

 

Best regards,

Gayathrie

IFS Global Support

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@Gayathrie Thiruvalluvar Thank you! :relaxed:

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