What an elimination is
Consolidated statements present a parent and its subsidiaries as one economic entity. IFRS 10, and Ind AS 110 in India, require intragroup assets, liabilities, equity, income, expenses and cash flows to be eliminated in full. If they weren't, a group could inflate its revenue by selling to itself.
Three rules cover most of it:
- Every elimination has two sides, so the eliminations column nets to zero.
- Most eliminations don't change group profit. They shrink revenue and costs, or assets and liabilities, by the same amount. Unrealised profit is the exception.
- Eliminations live in the consolidation, not in the books. Each company's own ledger stays as it is, because it is right for that company's own accounts.
The examples below use one group: Holding Ltd, which owns 100% of Sub A and Sub B unless stated otherwise.
Receivables and payables
Holding has recharged shared costs to Sub A, and 600 is unpaid at month end. Holding shows a receivable; Sub A shows the matching payable. Both go.
| Line | Holding | Sub A | Eliminations | Consolidated |
|---|---|---|---|---|
| Trade receivables | 4,200 | 1,900 | – | 6,100 |
| Due from Sub A | 600 | – | (600) | – |
| Due to Holding | – | (600) | 600 | – |
| Eliminations net | – |
One account against several
Many parents keep a single "Due from subsidiaries" account. Then one balance has to be matched against accounts in several companies that add up to it.
| Line | Holding | Sub A | Sub B | Elim. | Consol. |
|---|---|---|---|---|---|
| Due from subsidiaries | 1,000 | – | – | (1,000) | – |
| Due to Holding | – | (600) | – | 600 | – |
| Due to parent | – | – | (400) | 400 | – |
| Eliminations net | – |
If Sub A and Sub B add up to 990, there is a difference of 10 to find before you eliminate. Don't force it.
A single account works, but one account per subsidiary ("Due from Sub A", "Due from Sub B") makes each pair visible and differences easier to trace.
Loans and interest
Holding lent Sub B 50,000 at 8%. The loan is a balance like any other, and the interest is income in one company and expense in the other. Eliminate all four.
| Line | Holding | Sub B | Eliminations | Consolidated |
|---|---|---|---|---|
| Loan to Sub B | 50,000 | – | (50,000) | – |
| Loan from Holding | – | (50,000) | 50,000 | – |
| Interest income | 4,000 | – | (4,000) | – |
| Interest expense | – | (4,000) | 4,000 | – |
If tax was withheld on the interest (TDS in India, for example), the two sides' interest receivable and payable differ by the tax withheld. That tax is a balance with the tax authority, not with each other, so it stays. GST on intercompany invoices works the same way.
Sales and purchases
Holding sells goods that cost it 21,000 to Sub A for 30,000. Sub A sells all of them to outside customers for 40,000.
| Line | Holding | Sub A | Eliminations | Consolidated |
|---|---|---|---|---|
| Revenue | 30,000 | 40,000 | (30,000) | 40,000 |
| Cost of sales | (21,000) | (30,000) | 30,000 | (21,000) |
| Gross profit | 9,000 | 10,000 | – | 19,000 |
Seen from outside, the group bought goods for 21,000 and sold them for 40,000. Revenue would be overstated by 30,000 without the elimination; profit is the same either way.
Management fees, recharges and dividends
Holding charges Sub B a management fee of 12,000 a year. Holding books fee income, Sub B books an expense, and both are eliminated: income (12,000) in the eliminations column, expense 12,000. Group profit is unchanged, and the group's revenue and overheads each fall by 12,000. Recharges of shared costs, royalties and guarantee fees work the same way. Any unpaid part of the fee is also a receivable and payable, eliminated as above.
Dividends within the group
Sub B pays Holding a dividend of 5,000. Holding books dividend income; Sub B reduces its retained earnings. Eliminate Holding's dividend income against the dividend in Sub B's equity, and group retained earnings are unchanged: the cash only moved from one pocket to another. If Sub B were 80% owned, Holding would receive 4,000, which is eliminated; the 1,000 paid to the outside shareholders really left the group, and reduces non-controlling interests.
Unrealised profit in stock
Go back to the goods Holding sold to Sub A, and suppose Sub A sold only half of them, for 20,000, by year end. The other half sits in Sub A's stock at 15,000, which is what Sub A paid. But the group paid only 10,500 for those goods (half of 21,000). The 4,500 difference is Holding's profit on goods that haven't yet left the group. From the group's point of view, it hasn't been earned.
| Line | Holding | Sub A | Sale | Unrealised | Consol. |
|---|---|---|---|---|---|
| Revenue | 30,000 | 20,000 | (30,000) | – | 20,000 |
| Cost of sales | (21,000) | (15,000) | 30,000 | (4,500) | (10,500) |
| Gross profit | 9,000 | 5,000 | – | (4,500) | 9,500 |
| Inventory | – | 15,000 | – | (4,500) | 10,500 |
Unrealised profit = stock from the group 15,000 × Holding's margin (9,000 ÷ 30,000 = 30%) = 4,500. The group sold goods that cost it 10,500 for 20,000: a gross profit of 9,500.
Two refinements your auditor will raise: the adjustment usually has a deferred tax effect, and when the seller is a partly owned subsidiary, part of the adjustment belongs to non-controlling interests.
Halfkit doesn't compute this
Unrealised profit needs to know how much stock came from other group companies and at what margin. Ledger balances don't say. Halfkit doesn't calculate unrealised profit: work it out from your stock records and make the adjustment outside Halfkit, for example in the exported consolidation worksheet.
Investment against equity
When Holding set up Sub B, it paid 100,000 for all of Sub B's shares. Holding shows an investment of 100,000; Sub B shows share capital of 100,000. In the group, that is the same money counted twice, so the investment is eliminated against the equity it bought.
| Line | Holding | Sub B | Eliminations | Consolidated |
|---|---|---|---|---|
| Investment in Sub B | 100,000 | – | (100,000) | – |
| Share capital | – | (100,000) | 100,000 | – |
If Holding had paid 80,000 for 80%, it would eliminate 80,000 of share capital, and the other 20,000 would become non-controlling interests. If a subsidiary is bought rather than set up, the investment is eliminated against the parent's share of equity at the acquisition date, including reserves earned before then, and any difference is goodwill (or, less often, a bargain purchase gain or capital reserve). That needs acquisition-date fair values and is a one-off calculation for your accountant. Halfkit doesn't calculate goodwill.
When currencies don't match
Holding reports in US dollars and invoices its Indian subsidiary a $10,000 fee. The subsidiary books a payable of ₹8,30,000 at the invoice-date rate of 83.00. At month end the rate is 84.00.
| Subsidiary's payable | Holding, USD | Sub, INR | Sub at 84.00, USD | Gap, USD |
|---|---|---|---|---|
| Not revalued | 10,000 | 8,30,000 | 9,881 | 119 |
| Revalued at 84.00 | 10,000 | 8,40,000 | 10,000 | – |
Revaluing books an exchange loss of ₹10,000 (about $119) in the subsidiary. After that, the pair matches and eliminates cleanly.
The fix is in the subsidiary's books: a foreign-currency payable is a monetary item, so under IAS 21 (Ind AS 21) it is restated at the closing rate each period. Two points follow:
- The exchange loss stays in the consolidated P&L. It is a real exposure: the subsidiary will need more rupees to pay the dollars. Exchange differences on intragroup monetary items aren't eliminated.
- Use the same rate for the pair. If the subsidiary revalued at a month-end rate but your consolidation translates at a monthly average, a small gap remains. Translate that month at the rate the subsidiary used.
Checklist
- Every intercompany balance has a matching balance in the other company.
- Differences are explained: in transit, currency, or misposted.
- Foreign-currency intercompany balances are revalued at the closing rate.
- Intercompany sales, fees, interest and dividends are eliminated on both sides.
- Unrealised profit in closing stock is calculated and adjusted.
- Each investment is eliminated against the equity it bought.
- The eliminations column nets to zero.
Choosing a tool for this? See how Halfkit compares. For the full process, read consolidating Xero organisations or consolidating TallyPrime companies.