A consolidated trial balance that does not balance intercompany accounts is a warning sign. A consolidated income statement that still carries profit on goods the group never sold outside is a misstatement. Eliminations are routine entries, yet they are where small consolidated files most often go wrong.
This guide works through the core entries: intercompany sales with unsold inventory, balances, loans and interest, and the effect of a noncontrolling interest (NCI). It closes with the audit tests for the elimination schedule. For the consolidation model itself, see /us/blog/asc-810-consolidation-private-companies.
What must be eliminated?
The objective is to remove intra-group profit or loss from consolidated results and to adjust the carrying amounts of assets that stay in the group. ASC 810 requires that any intra-entity profit or loss on assets remaining within the consolidated group be eliminated. Intercompany income covers profit from transferring inventory, property or other assets between consolidated companies, including variable interest entities. KPMG lists open account balances, security holdings, sales and purchases, interest and dividends among the intra-entity items that are eliminated.
Intercompany income is eliminated from the asset on a before-tax basis. The tax effect of the elimination is a separate computation, and the examples below ignore tax.
Does the NCI change the elimination?
The amount eliminated is not affected by the existence of a noncontrolling interest. Only the attribution of the elimination between the parent and the NCI can differ.
- Parent sells to a partially owned subsidiary (downstream). The full elimination is usually attributed to the controlling interest, because the transaction is not viewed as arm's length.
- Partially owned subsidiary sells to the parent (upstream). Two approaches are acceptable: full attribution to the controlling interest, or proportionate attribution between the controlling interest and the NCI.
- Variable interest entities. Fees and other income or expense between a primary beneficiary and a consolidated VIE are eliminated, and the effect is attributed solely to the primary beneficiary. KPMG notes the VIE subsections do not permit the elimination to be attributed to the NCI.
The attribution policy is a choice for upstream sales. KPMG observes that the Codification says the elimination "may" be allocated to the NCI and that the policy should fit the rights and priorities of the parent and the NCI. The file states the policy and applies it every year.
Worked entries
Illustrations with round numbers. Parent P owns 80 percent of subsidiary S.
1. Downstream sale with unsold inventory. P sells goods to S for $100,000. The goods cost P $60,000. At year end all of the goods sit in S's inventory. The elimination removes the intercompany sale and the $40,000 of profit that has not been realized outside the group:
| Account | Debit | Credit |
|---|---|---|
| Sales (P) | 100,000 | |
| Cost of sales | 60,000 | |
| Inventory (S) | 40,000 |
Consolidated inventory is carried at P's cost of $60,000. The whole $40,000 reduces the controlling interest's income, because the sale was downstream.
2. The unpaid balance. S has not paid for the goods. The receivable on P's books and the payable on S's books cancel:
| Account | Debit | Credit |
|---|---|---|
| Accounts payable (S) | 100,000 | |
| Accounts receivable (P) | 100,000 |
3. Intercompany loan and interest. P lent S $200,000 at 5 percent. S accrued and paid $10,000 of interest. The note, and the interest income and expense, are eliminated:
| Account | Debit | Credit |
|---|---|---|
| Notes payable (S) | 200,000 | |
| Notes receivable (P) | 200,000 | |
| Interest income (P) | 10,000 | |
| Interest expense (S) | 10,000 |
4. Upstream sale and attribution. Suppose instead S sold the goods to P, and S's profit of $40,000 is still in P's inventory. S's net income before the elimination is $200,000, and the NCI holds 20 percent.
| Full attribution | Proportionate attribution | |
|---|---|---|
| NCI share of S's income | 40,000 | 40,000 less 8,000 = 32,000 |
| Parent share of S's income | 160,000 less 40,000 = 120,000 | 160,000 less 32,000 = 128,000 |
| Total consolidated income from S | 160,000 | 160,000 |
Both methods give the same consolidated total. They differ in how it splits between the parent and the NCI.
When is the profit realized?
The deferred profit reverses when the inventory leaves the group. If S sells the goods from example 1 to an outside customer in the following year, the $40,000 that was eliminated is recognized in consolidated income that year. The file carries a rollforward of deferred intercompany profit for this reason.
What if the buyer writes the inventory down?
The holder tests its own inventory for lower of cost or net realizable value. A write-down interacts with the elimination, because the consolidated carrying amount cannot exceed the group's cost. Work through the write-down and the elimination together and document the result. Inventory valuation is covered in /us/blog/inventory-costing-asc-330-fifo-average-lifo-nrv.
Audit angle
- Reconcile intercompany accounts first. Agree each entity's receivable and payable for the same pairs, and clear differences in timing and amount before any entry. Unreconciled differences mean the eliminations are wrong or incomplete.
- Test the elimination schedule. Trace each line to the entities' ledgers and to the consolidation worksheet. Recompute unrealized profit as ending intercompany inventory times the intercompany margin, and agree the inventory quantities to the count.
- Check the attribution policy. Check that the upstream method is stated, applied consistently and not applied to a VIE, where the elimination is attributed to the primary beneficiary.
- Test the realization rollforward. Opening deferred profit, realized on outside sales, closing balance.
- Test the write-down interaction. Check that lower of cost or net realizable value was applied at the holder and that the elimination and the write-down are not double counted.
- Tie to the statements. Total eliminations in the worksheet zero out on the consolidated balance sheet, and consolidated income agrees to the sum of entity results less eliminations.
- Consider component work. If component auditors cover subsidiaries, see /us/blog/group-audits-au-c-600-sas-149.
Common misstatements: eliminating the sale but leaving profit in ending inventory, eliminating balances that do not match so a plug stays in the consolidation, missing interest on intercompany loans, and mixing attribution methods between years.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- KPMG, Handbook: Consolidation (intra-entity eliminations, VIE and voting interest attribution, upstream inventory example): https://kpmg.com/us/en/frv/reference-library/2026/handbook-consolidation.html
- PwC Viewpoint, Consolidation guide, 8.2 Intercompany transactions: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/consolidation_and_eq/consolidation_and_eq_US/chapter_8_intercomp_US/82_intercomp_tran_US.html
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