Intercompany Transaction

Groups often trade within themselves. A manufacturing subsidiary may sell products to a sales subsidiary in another country, a parent may lend money to a subsidiary, or a central services company may charge other group companies for IT and finance support.

In the separate accounts of each company, these transactions are recorded like any other. But in the consolidated accounts, which present the group as a single business, they must be removed, because a group cannot make a sale to itself or owe money to itself.

For example, if one subsidiary sells goods to another for 500,000, the group's consolidated revenue and costs must both be reduced by 500,000, and any profit still sitting in unsold inventory must be removed.

Intercompany transactions require careful tracking and matching between group companies, which can be a major task during the financial close. Across borders, their prices also determine where profits are taxed, so they must follow transfer pricing rules.