Intercompany Elimination Example

This example involves intercompany transactions for a global organization with multiple subsidiaries and currencies. The organization has four subsidiaries in a three-level hierarchy that roll up to the consolidated parent subsidiary.

Diagram of three-level intercompany hierarchy.

The hierarchy is based on geography and represents the following organizational relationships:

In this example, the U.K. subsidiary transfers funds to the EU subsidiary using the following parameters:

The journal entry for the intercompany transfer of funds is as follows:

Subsidiary

Account

Transaction Currency GL Impact

Subsidiary Base Currency GL Impact

Debit

Credit

Debit

Credit

U.K.

Intercompany Expense

100 GBP

100 GBP

U.K.

Cash U.K.

100 GBP

100 GBP

EU

Cash EU

100 GBP

150 EUR

EU

Intercompany Revenue

100 GBP

150 EUR

When the funds transfer occurred, the currency exchange rate was 1.5 EUR to 1.0 GBP. The base currency of the U.S. Elimination subsidiary is USD. At the end of the month, the currency rate is 2 USD to 1 GBP.

Because the foreign currency exchange rate fluctuated during the period, the resulting gain or loss posts to the cumulative translation adjustment - elimination (CTA-E) account. When you run the intercompany elimination process at period close, NetSuite eliminates the revenue and expense directly to the CTA-E account. The consolidated exchange rates used by the income statement accounts are different from the consolidated exchange rates used by the balance sheet accounts:

Running intercompany elimination produces two results.

  1. The elimination journal entries post to the U.S. Elimination subsidiary to eliminate revenue and expense from the consolidated financials.

  2. The original and elimination journal entries roll up to the Global HQ-US subsidiary. Any unbalanced currency adjustment gain and loss amounts accumulate in the CTA-E account.

Subsidiary

Account

Elimination JE in Original Offsetting Currency

HQ Consolidation Currency GL Impact

U.S. Elimination

Intercompany Revenue

Dr 150 EUR

Dr 300 USD (Eliminate revenue at HQ)

U.S. Elimination

CTA-E

Cr 150 EUR

Cr 300 USD

U.S. Elimination

CTA-E

Dr 100 GBP

Dr 250 USD

U.S. Elimination

Intercompany Expense

Cr 100 GBP

Cr 250 USD (Eliminate expense at HQ)

After running intercompany elimination, the CTA-E account has a translation adjustment balance of 50 USD.

Warning:

Setting different exchange rate types for different accounts can result in balance sheet discrepancies, particularly discrepancies in consolidated reports.

Related Topics:

Key Points for Running Intercompany Elimination
Cumulative Translation Adjustment-Elimination (CTA-E)
Summarized Intercompany Elimination Journal Entries
Intercompany Elimination Overview

General Notices