Eliminating Intercompany Transactions

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Overview

Many company groups deal with intercompany transactions that need to be eliminated at the consolidated level. Depending on whether all entities share the same base currency or not, the elimination process may involve different steps. This guide provides two distinct approaches:

• Single-currency: A straightforward process, as no currency differences arise.

• Multi-currency: Additional steps are required to handle currency exchange rate fluctuations.

Refer directly to the section that best fits your group’s structure so you only read what’s most relevant to your scenario.

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Basics

At a consolidated level, transactions between entities within the same group should not impact the overall financials. Eliminations ensure these internal transactions do not inflate your group-wide results.

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Same base currency

When all entities share the same base currency, you can eliminate intercompany transactions without worrying about currency fluctuations. This process focuses solely on identifying and removing any internal transactions to present a clean, consolidated picture.

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Identifying intercompany transactions

To begin, pinpoint the relevant intercompany transactions. These are often tracked through specific general ledger accounts or distinct dimension values. Separating these transactions into their own rows in Francis allows you to clearly isolate and target them.

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Eliminating intercompany transactions

Keep the intercompany data intact for each individual entity’s standalone reporting, but remove it at the group level. Use a dedicated instance – often called “Eliminations” – to record all entries that offset these internal transactions.

Create elimination entries by applying the opposite sign to the identified transactions. For example, if an entity shows a receivable of 100, add an entry of -100 in the Eliminations instance. This ensures that when consolidating, these offsets cancel each other out, preventing double counting and presenting more accurate group-wide financials.

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Different base currencies

If the companies involved differ in base currency, you need to take one additional step when eliminating inter-company transactions. This step involves accounting for the difference in the inter-company transactions that arise from currency fluctuations.

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Accounting for currency fluctuations

When multiple entities record intercompany transactions in different currencies, later converted to a unified currency in Francis using updated exchange rates, differences in amounts may arise due to fluctuating rates.

You must create rows to account for exchange rate fluctuations to eliminate these amounts. Note that accounting frameworks like IFRS and GAAP provide specific rules on where these fluctuations should be recorded.

In the video above, we walk you through the simple setup process, allowing you to decide where to allocate the effects of fluctuating currencies.

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Important considerations

The suggested approach, which involves calculating the residual between the two amounts, assumes that all differences arise solely from exchange rate fluctuations. However, if the rows do not inherently include the same items - e.g., due to bookkeeping errors or using one account for multiple purposes - you risk over-allocating a discrepancy to the currency adjustment.