Intercompany elimination is conceptually simple. If one entity in your group owes another entity in the same group, that balance is not real from the group's perspective, so it comes out on consolidation. The group cannot owe itself money or sell itself services.
In practice, intercompany is where most consolidations break, and the reason is almost always the same: the two sides of the transaction were recorded independently.
Intercompany loans. The parent funds the subsidiary. Both sides record it, but at different dates or different FX rates, or one side records it as equity and the other as debt. The balances do not agree, so they do not eliminate cleanly.
Management fees and recharges. The Australian parent charges the US subsidiary for shared services. This is often posted as a journal in one entity at year end, with the matching entry missed, timed differently, or booked to a different account.
Intercompany trading. One entity sells to another, which sells on to an external customer. Revenue and cost of sales eliminate, but if any of that stock or work in progress is unsold at period end, there is unrealised profit sitting in inventory that has to be eliminated too.
Cost allocations. Engineering sits in one entity and serves the whole group. The allocation basis is agreed once and then applied inconsistently, or changes without both sides updating.
Three structural causes.
Independent recording. Entity A's accountant posts the invoice; Entity B's accountant posts the bill separately, perhaps in a different period, perhaps to a different account. Nothing enforces symmetry.
FX applied differently. Covered in more detail in our piece on AASB 121 translation, but briefly: if the two sides translate at different rates, the residual is a real difference that has to go somewhere.
Timing. A recharge raised on 30 June and received on 2 July is in transit. That is legitimate, but it has to be identified as in-transit rather than treated as a mismatch — otherwise it looks like an error every month end.
Whether you are on a modern platform or a spreadsheet, the same disciplines apply.
The structural improvement in a modern ledger is that the transaction is created once and generates both sides simultaneously. Entity A raises a recharge to Entity B; the system creates the receivable in A and the payable in B, in the same period, at the same rate, flagged as a matched pair.
Elimination then becomes a property of the data rather than a month-end exercise. The consolidated view is computed with the pairs removed, and the reconciliation is a report rather than a project.
That is what native intercompany consolidation means, and it is the main reason groups move off spreadsheet consolidation — not speed, but the elimination of an entire class of error.
If you are moving to a new system, clean the intercompany history first. Unreconciled historical balances become opening balances, and opening balances that do not eliminate become audit findings.
We cover this and four related problems in the data problems to fix before an ERP migration.
Intercompany clean-up is a standard workstream in our implementations, and often the longest one. It is unglamorous and it determines whether the first consolidated close works.
If your group consolidation currently requires a balancing adjustment, that is the thread to pull.