On consolidation every balance and transaction between group companies is removed in full: intra group sales and purchases, receivables and payables, loans and the interest on them, management charges and dividends paid up the group. FRS 102 paragraph 9.15 also requires any profit or loss on intra group trading that is still sitting in stock or fixed assets to be removed in full. What is left is the group’s dealings with the outside world.

Why do intra group items have to be removed at all?

Consolidated accounts present the parent and its subsidiaries as a single reporting entity (FRS 102 paragraph 9.13). A single entity cannot sell to itself, owe itself money or pay itself a dividend, so anything that only exists because one group company dealt with another has to come out. If it stayed in, group turnover, costs, assets and liabilities would all be overstated even though nothing had changed in the group’s position with customers, suppliers and lenders.

The rule appears in three places. Paragraph 9.15 of FRS 102 says intragroup balances and transactions, including income, expenses and dividends, are eliminated in full. For companies, Schedule 6 paragraph 6(1) to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) says debts and claims between undertakings included in the consolidation, and income and expenditure on transactions between them, must be eliminated. Groups reporting under IFRS apply IFRS 10 paragraph B86(c), which goes further and expressly includes intragroup cash flows as well.

The wider mechanics are covered in FRS 102 Section 9 consolidated accounts.

Which items are eliminated?

Item What is removed
Sales between group companies The seller’s turnover and the buyer’s purchases (cost of sales), for the full invoiced amount
Trade balances The receivable in one company and the payable in the other
Intra group loans The loan asset and loan liability, and the interest income and interest expense
Management charges and recharges The income in the charging company and the expense in the company charged
Dividends paid up the group The parent’s dividend income and the subsidiary’s dividend to the parent
Profit on goods or assets still held The profit element left in stock or fixed assets at the year end
Parent’s investment The cost of investment, set against the parent’s share of the subsidiary’s equity (paragraph 9.13(b))

How are intra group sales and purchases cancelled?

The whole value of the intra group sale is removed from both sides of the profit and loss account, whether or not the buyer has sold the goods on. The ACCA technical factsheet on FRS 102 consolidations shows the entry as a debit to revenue and a credit to cost of sales for the full invoiced amount. Gross profit is unchanged by this entry.

If some of the goods are still in the buyer’s stock at the year end, a second adjustment removes the profit element in that stock. That is a separate calculation, explained in unrealised profit on intra group stock. A common exam and practice error, highlighted in an ACCA article on simple consolidations, is to remove the unrealised profit but forget to cancel the sale itself, or the other way round.

How are loans, interest and management charges dealt with?

A loan from parent to subsidiary sits as an asset in one balance sheet and a liability in the other. Both are removed. The interest on it is removed from group finance income and group finance costs, as the ACCA factsheet notes. Accrued interest not yet paid is part of the intercompany balance and comes out too.

Management charges work the same way. If the parent charges each subsidiary a fee for central services, the parent’s income and the subsidiaries’ administrative expenses are reduced by the same amount. The underlying costs of providing the service, such as head office salaries, stay in the group accounts because they were paid to outsiders.

Foreign currency loans are the exception to a clean cancellation. FRS 102 paragraph 30.22 says an intragroup monetary asset or liability cannot be eliminated against its counterpart without showing the results of currency movements, because it is a real commitment to convert one currency into another. The exchange difference stays in group profit or loss, or in other comprehensive income where paragraph 30.13 applies.

What happens to dividends paid up the group?

A dividend from a subsidiary to its parent is income in the parent’s own accounts but is simply cash moving within the group. Paragraph 9.15 eliminates it. The ACCA factsheet summarises the result: only dividends paid by the parent to its own shareholders appear in the consolidated statement of changes in equity, and any dividend income left in the consolidated profit and loss account must come from investments other than subsidiaries. A dividend paid by a partly owned subsidiary to its outside shareholders is not eliminated; it reduces the non controlling interest.

Where a subsidiary has declared a dividend before the year end but not paid it, the dividend receivable in the parent and the payable in the subsidiary are cancelled like any other intercompany balance. The company law rules on whether each company can lawfully pay the dividend are separate, and are covered in paying dividends up a group structure.

Why do the intercompany balances not agree, and what do you do?

Before balances can be cancelled they have to match. The ACCA factsheet notes that agreeing intra group balances can be arduous, and that the usual cause of a mismatch is items in transit, including cash. Typical reasons are:

  • Cash in transit. The subsidiary paid the parent on the last day of the year but the parent recorded the receipt after the year end. The adjustment is to treat the cash as received, increasing group cash and reducing the parent’s receivable, so the balances then agree.
  • Goods in transit. The seller has invoiced but the buyer has not yet recorded the goods. Group stock and the buyer’s payable are increased, then the balances are cancelled. If the goods carry a profit, they are also part of the unrealised profit calculation.
  • Disputed or unrecorded recharges. One company has booked a charge the other has not accepted. The group needs to decide which entry is right and correct it, not simply force the balances to agree through a suspense line.

What about profit left in stock or fixed assets?

Paragraph 9.15 says profits and losses from intragroup transactions that are recognised in assets, such as inventory and property, plant and equipment, are eliminated in full. Schedule 6 paragraph 6(3) to SI 2008/410 would allow this elimination to be made only in proportion to the group’s interest in the shares, but FRS 102 is stricter and requires full elimination, so the proportional route is not available to an FRS 102 group.

Two further points in paragraph 9.15 are easy to miss. An intragroup loss may be a sign that the asset is impaired, in which case the loss is not simply reversed but considered under Section 27. And Section 29 applies to timing differences created by eliminating intragroup profits, so deferred tax may need to be recognised on the adjustment.

How does this look in practice?

Illustration only. Parent owns 100% of Sub. During the year Parent sold goods to Sub for £60,000 that cost Parent £45,000, and Sub sold all of them on to customers before the year end. Parent lent Sub £100,000 and charged £5,000 interest, all paid. Parent charged Sub a £12,000 management fee. Sub paid Parent a dividend of £20,000. At the year end Sub owes Parent £8,000 on trading account, but Parent’s ledger shows £10,000 because Sub’s £2,000 payment was banked after the year end.

Adjustment Debit Credit
Cancel intra group sale Turnover £60,000 Cost of sales £60,000
Cancel interest Interest receivable £5,000 Interest payable £5,000
Cancel loan Loan liability £100,000 Loan asset £100,000
Cancel management fee Other operating income £12,000 Administrative expenses £12,000
Cancel dividend Dividend income £20,000 Dividends paid (Sub) £20,000
Cash in transit Cash £2,000 Receivables £2,000
Cancel trading balance Payables £8,000 Receivables £8,000

Group profit is unchanged by any of these entries except the dividend: the parent’s £20,000 of dividend income disappears because, from the group’s point of view, the profit was already counted when Sub earned it. Because all the goods were sold on, there is no unrealised profit to remove.

What mistakes come up most often?

  • Cancelling only the parent’s share of an intra group sale or balance in a partly owned subsidiary. Eliminations are always 100%, because consolidation adds in 100% of the subsidiary’s figures.
  • Leaving the parent’s dividend income from subsidiaries in group profit, which double counts the subsidiary’s profit.
  • Forcing mismatched intercompany balances to agree without finding the cash or goods in transit.
  • Treating foreign currency intercompany loans as if the exchange differences cancel.
  • Assuming the eliminations change anyone’s tax. HMRC’s Company Taxation Manual at CTM80105 explains that even group relief stops short of treating a group as a single company; each company is still taxed on its own results, so a management charge eliminated in the group accounts can still be taxable in one company and deductible in another. See group relief for the rules that do look across the group.

Schedule 6 paragraph 6(4) to SI 2008/410 allows amounts that are not material for a true and fair view to be left uneliminated, though once balances agree the entries are mechanical and most groups eliminate everything.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.