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The CFO of a group aims to centralise entity data to gain a global view of overall performance. This is known as management consolidation, obtaining a reliable view of group data through consolidated financial reporting. Consolidation enables the CFO to manage differences between subsidiaries and align each entity’s information: different currencies, different accounting teams, different bookkeeping practices…
To ensure accurate and reliable group performance management, it is essential to manage intercompany transactions (commonly called “intercos”). While this practice is particularly critical once a year during financial close and tax declarations, we strongly recommend eliminating intercos every month. This provides a reliable, up-to-date view of group results, excluding internal transactions, and avoids artificially inflating revenue or expenses at group level.
To guide you through this process, here are the key steps to better understand the concept, its challenges, and, of course, to identify the simplest solution for reconciling and eliminating intercompany transactions.
Definition: Intercompany transactions, commonly called “intercos”
An intercompany transaction is an accounting or commercial transaction that occurs between two entities of the same group. There are 4 main types: purchases/sales, current accounts, loans, and goodwill.
For example, a subsidiary in France sells products to another group subsidiary in Belgium. The French entity invoices the Belgian entity. This counts as revenue for the French entity and an expense for the Belgian one. However, at group level, it is an internal operation that should not be recognised, as it does not create value at that level.
The group CFO or consolidator therefore seeks to easily identify and eliminate these transactions in consolidated reporting.
Step 1: Define relationships between entities and establish a group policy
Before identifying and eliminating intercos, the group CFO must define existing relationships between entities. This involves taking stock of the current situation and, if necessary, creating a group policy.
This requires:
- Defining a consistent way of naming interco transactions in each subsidiary to make them easily identifiable
- Listing all types of exchanges between group entities
Step 2: Reconcile interco transactions in consolidated accounting
After mapping relationships between entities, and before eliminating intercos, it is necessary to identify them in each subsidiary’s accounts. This is called interco reconciliation, i.e. identifying all intercompany inflows and outflows within each subsidiary.
This step is the most laborious if not anticipated, since flows must be presented consistently across subsidiaries (as outlined in Step 1). This means currencies must be aligned or comparable, invoiced amounts must match, and accounting entries must be labelled consistently.
The group finance team preparing the consolidated financial statements must then eliminate all intercos to avoid counting internal operations. If not eliminated, revenue will be artificially inflated, margins distorted, and the company’s financial reliability compromised.
Step 3: Eliminate intercos in consolidated accounting
Once interco transactions are identified, they must be easily removed from consolidated reporting so that group performance reflects only external transactions. This process, called interco elimination, neutralises all operations between group entities.
As you can imagine, reconciliation and elimination are essential — but also time-consuming. If you have 10 subsidiaries multiplied by all their interactions… the result is overwhelming. And it’s even worse if every transaction must be identified manually without an automated tool.
To avoid the year-end rush, where corrections take longer and carry greater risk, we recommend:
- Performing monthly interco reconciliations: this practice is becoming standard among groups, as it quickly identifies discrepancies (amounts, currencies, dates, descriptions, etc.) and avoids inconsistencies at closing
- Using a reporting software that automates interco management — from identification through to elimination — to ensure performance management is based solely on external transactions
Automating interco management
To meet the challenges of reliability and efficiency, groups should use specialised reporting software to automate intercompany management throughout the year.
This allows you to view consolidated dashboards in multiple ways:
- Without intercos: get a reliable, accurate view of group performance based solely on external transactions
- With intercos: get a global view of performance including intercompany operations, and compare it with the “without intercos” view to understand their impact on results
- Intercos only: instantly see the volume of internal transactions, check correct booking, and assess the interdependence between subsidiaries
This is why, at EMAsphere, we’ve added a dedicated module to automate, reconcile, and secure intercompany operations.