Without eliminations, group revenue and assets are overstated, sometimes by a large margin. This guide explains what to eliminate and why, a worked example with journal entries, why intercompany balances often don't match, and what the UAE and Saudi tax rules add.
What are intercompany transactions, and why eliminate them?
They are dealings between companies under common control: a trading company selling stock to its retail sister company, a holding company charging management fees, or one company lending cash to another. In each company's own books they are real sales, fees and loans.
For the group as a whole, they are not. Moving stock from one group warehouse to another earns the group nothing, and money one group company owes another is not owed to anyone outside. Consolidated accounts present the group as a single economic entity, so IFRS 10 requires these items to be eliminated in full, including profits that are still held inside the group in assets such as inventory and fixed assets.
If they stay in, the consolidated figures are inflated twice over: revenue and costs both include the internal sale, and receivables and payables both include the internal balance. Margins look different from reality, and banks or investors reading the accounts get the wrong picture of the group's size.
Which intercompany items do you eliminate?
Every item where one group company's income, asset or equity is another group company's expense, liability or investment. The common ones:
| Intercompany item | In the seller's or lender's books | In the buyer's or borrower's books | Elimination |
|---|---|---|---|
| Sale of goods or services | Revenue | Cost of sales, expense or inventory | Remove both sides |
| Profit on stock still held at year-end | Included in profit | Included in inventory value | Reduce inventory and profit by the unrealised margin |
| Sale of a fixed asset at a gain | Gain on disposal | Asset at the higher price | Remove the gain; restate the asset and its depreciation |
| Balances owed | Receivable | Payable | Remove both |
| Loans and interest | Loan receivable, interest income | Loan payable, interest expense | Remove both |
| Management fees and recharges | Fee income | Expense | Remove both |
| Dividends | Dividend income | Reduction in retained earnings | Eliminate the dividend income against the subsidiary's dividend paid |
| Investment in a subsidiary | Investment | Share capital and pre-acquisition reserves | Remove both; goodwill is the cost of the investment less the fair value of the subsidiary's identifiable net assets at acquisition |
Most of these have no effect on group profit, because both sides cancel. The exceptions are unrealised profits on stock and fixed assets, which reduce group profit until the asset is sold outside the group or used up.
How do you eliminate intercompany transactions? A worked example
A Dubai group has two companies. Trading LLC imports and wholesales household goods. It owns 100% of Retail LLC, which runs the group's shops. During the year:
- Trading sold goods to Retail for AED 1,000,000. They cost Trading AED 800,000, a 20% margin on the selling price.
- At year-end, Retail still had 30% of those goods in stock, valued at AED 300,000.
- Retail owed Trading AED 250,000 at year-end for goods supplied.
- Trading charged Retail a management fee of AED 120,000.
Step 1: the elimination entries
| # | Entry | Debit (AED) | Credit (AED) |
|---|---|---|---|
| 1 | Revenue (Trading) / Cost of sales (Retail) | 1,000,000 | 1,000,000 |
| 2 | Cost of sales / Inventory: unrealised profit, 300,000 × 20% | 60,000 | 60,000 |
| 3 | Payables (Retail) / Receivables (Trading) | 250,000 | 250,000 |
| 4 | Fee income (Trading) / Administrative expenses (Retail) | 120,000 | 120,000 |
Step 2: the consolidation worksheet
| AED | Trading | Retail | Simple total | Eliminations | Group |
|---|---|---|---|---|---|
| Revenue | 6,000,000 | 3,000,000 | 9,000,000 | −1,000,000 | 8,000,000 |
| Cost of sales | 4,550,000 | 2,000,000 | 6,550,000 | −940,000 | 5,610,000 |
| Gross profit | 1,450,000 | 1,000,000 | 2,450,000 | −60,000 | 2,390,000 |
| Inventory | 900,000 | 700,000 | 1,600,000 | −60,000 | 1,540,000 |
| Receivables | 1,200,000 | 150,000 | 1,350,000 | −250,000 | 1,100,000 |
| Payables | 600,000 | 480,000 | 1,080,000 | −250,000 | 830,000 |
The cost of sales elimination is entry 1 less entry 2: 1,000,000 minus 60,000. Group revenue falls by AED 1 million, but group gross profit falls by only AED 60,000, the profit still sitting in Retail's shelves. The management fee cancels out within administrative expenses and other income, so it changes no profit figure.
Step 3: the check. Group cost of sales should equal what the group paid outsiders for the goods it sold. Trading's own external sales cost AED 3,750,000, Retail's other purchases sold cost AED 1,300,000, and the goods Retail sold from Trading cost the group AED 560,000 (700,000 at 80%). The total is AED 5,610,000, which matches the worksheet.
Next year, when Retail sells the remaining stock, the AED 60,000 profit is recognised in group results.
Why don't intercompany balances match, and how do you fix them?
Because each company records its side separately, at different times and sometimes in different currencies. If Trading shows AED 250,000 owed by Retail but Retail shows AED 236,000 owed to Trading, the elimination leaves AED 14,000 hanging in the group accounts.
| Cause | Example | Fix |
|---|---|---|
| Timing | Goods invoiced on 31 March, received on 2 April | Agree a cut-off: the buyer accrues goods in transit |
| Only one side posted | Management fee charged, not yet booked by the receiver | The receiver posts every intercompany invoice before close |
| Exchange rates | A Saudi company records in SAR, the UAE one in AED, at different rates | One group rate table for intercompany items |
| Disputes | Retail rejects part of a delivery | Credit note issued before close, not after |
| Wrong account | The fee is posted to a third-party supplier account | Separate intercompany accounts for each group company |
Run a monthly intercompany reconciliation, not just at year-end:
In an ERP where each group company is set up in the same system, an intercompany sale can create the matching purchase automatically in the other company. Both sides then match by design, and eliminations can be generated from the intercompany accounts.
What do UAE and Saudi tax rules add to intercompany transactions?
Two things: intercompany prices must be at arm's length, and in some groups the tax return eliminates intercompany transactions too. Accounting eliminations remove these items from the group accounts; tax rules decide how each company is taxed on them.
| UAE corporate tax | Saudi Arabia | |
|---|---|---|
| Pricing | Related-party transactions must meet the arm's length standard (Article 34) | Transfer pricing rules apply to income tax payers, and to Zakat payers for financial years starting on or after 1 January 2024 |
| Filing as a group | A tax group files as one taxable person and eliminates transactions between its members; it needs 95% ownership, UAE residence, and the same financial year and accounting standards | Wholly owned subsidiaries of Saudi or GCC Zakat payers can be included in a consolidated Zakat filing |
| Documentation | A transfer pricing disclosure with the return; a master file and local file if revenue is AED 200 million or more, or group revenue AED 3.15 billion or more | A disclosure form with the return; master file and local file above related-party transaction thresholds that depend on the type of taxpayer |
There is also a deferred tax effect. When the two companies in our example are taxed separately, Trading has already been taxed on the AED 60,000 profit that the group eliminates. Under IAS 12 this creates a temporary difference: at the UAE's 9% rate, a deferred tax asset of AED 5,400 in the group accounts, released when Retail sells the stock.
The management fee in the example is a related-party charge. It needs a basis you can defend, such as the cost of the services plus a markup, and a written agreement. Confirm thresholds and treatment with your tax adviser.
What does HYP see in group consolidations?
At groups that consolidate in spreadsheets, the close is usually held up by the intercompany reconciliation, not the eliminations themselves. Each finance team waits for the other to confirm a balance, and differences found at year-end are months old.
The groups that close fastest have three things in common:
- All group companies run in one ERP, with intercompany invoices created on both sides at once.
- A separate intercompany account for each pair of companies, so the balances to eliminate are obvious.
- A monthly confirmation, so year-end is the twelfth routine check of the year.
See how HYP handles multi-company ledgers and consolidation on our General Ledger & Financial Control page. If intercompany balances sit in bank accounts across the group, our guide to the daily bank reconciliation process helps keep each company's cash figure right.
Sources
- IFRS Foundation: IFRS 10 Consolidated Financial Statements, paragraph B86
- UAE Ministry of Finance: Federal Decree-Law No. 47 of 2022 on Corporate Tax, Articles 34, 40, 42 and 55
- UAE Ministry of Finance: Ministerial Decision No. 97 of 2023 on transfer pricing documentation
- ZATCA: Zakat General Guideline, October 2024 (transfer pricing for Zakat payers)
- ZATCA: Transfer Pricing Guidelines
- PwC Tax Summaries: Saudi Arabia, group taxation