An intercompany reconciliation checks that what one group company records as owed by or to another group company agrees with what the other company records, at the same date. Once the two sides agree, the balances and the related income and expenses are cancelled out on consolidation, because under FRS 102 paragraph 9.15 intragroup balances and transactions are eliminated in full. If the two sides do not agree, the group accounts are left with a difference that has to be explained before they can be finalised.

What creates intercompany balances?

Any transaction between two companies in the same group creates a matching pair of entries: a receivable in one company and a payable in the other, or income in one and expense in the other. The common sources are:

  • sales of goods or services from one group company to another;
  • management charges and recharges of shared costs such as payroll, rent and insurance;
  • loans and the interest on them;
  • dividends paid by a subsidiary to its parent;
  • one company paying a bill on behalf of another.

Each company is a separate legal entity with its own accounting records, so each balance appears in each company’s own accounts. Only the consolidated accounts treat the group as a single reporting entity, which FRS 102 paragraph 9.13 describes as combining the financial statements line by line and then eliminating what is internal to the group. The mechanics of group accounts are covered in FRS 102 Section 9: consolidated and separate accounts; this page deals with getting the balances to agree first.

Why do the two sides not agree?

  • Cash in transit. One company has paid and recorded the payment; the other has not yet received or posted it.
  • Goods or invoices in transit. The seller has invoiced on dispatch; the buyer records the purchase on receipt or when the invoice is approved.
  • One sided postings. A recharge journal is posted in the company making the charge but never in the company being charged.
  • Different accounts. One side codes an amount as a loan and the other as trade, so each account pair looks wrong even if the total agrees.
  • Foreign currency. Each company translates the balance at its own rate or on a different date.
  • Disagreement. The receiving company does not accept a management charge, or the amount of it.

How should a group agree its intercompany balances?

  1. Set up one intercompany account per counterparty in each company’s ledger, split between trading and loan balances, so every balance has an obvious mirror.
  2. Agree a cut off. For example, all intercompany invoices and recharges for the month must be issued by the second working day, and the receiving company posts them in the same period even if the documents arrive late.
  3. Make the charging company responsible. The company issuing the invoice or recharge sends the supporting schedule to the receiving company at the same time.
  4. Exchange balances. At each month end every company sends its balances with each counterparty, in the transaction currency, to a central reconciler.
  5. Match and investigate. Pair the balances and list differences. Classify each as a timing item, a posting error or a dispute.
  6. Correct promptly. Post missing entries in the period they relate to. Disputes go to someone with authority over both companies.
  7. Settle regularly. Netting off and paying trading balances each month or quarter stops old, unexplained balances building up.

A written agreement for recurring charges, setting out what is charged, how it is calculated and when, prevents most disputes.

What does elimination on consolidation involve?

FRS 102 paragraph 9.15 requires intragroup balances and transactions, including income, expenses and dividends, to be eliminated in full. It also requires profits and losses on intragroup transactions that are recognised in assets, such as inventory and property, plant and equipment, to be eliminated in full. It adds that an intragroup loss may indicate an impairment, and that Section 29 deals with the timing differences that arise for deferred tax.

In practice there are three types of elimination:

  • Balances. The intercompany receivable is set against the intercompany payable.
  • Transactions. Intragroup sales are removed from revenue and from cost of sales; intragroup interest and management charges are removed from income and expense; intragroup dividends are removed from the parent’s income.
  • Unrealised profit. Profit made by one group company on goods still held by another at the year end is removed from inventory and from group profit.

What does a worked example look like?

Illustration only. Parent sells goods to its wholly owned subsidiary at cost plus a third. During the year Parent invoiced £40,000 for goods that cost it £30,000. At the year end:

  • Parent’s ledger shows £12,000 receivable from the subsidiary.
  • The subsidiary’s ledger shows £9,500 payable to Parent.
  • The difference is a £2,500 payment the subsidiary made on the last day of the year, which reached Parent’s bank after the year end.
  • The subsidiary still holds goods bought from Parent for £8,000.
Consolidation adjustment Debit £ Credit £
Cash in transit: recognise in group cash, reduce Parent’s receivable 2,500 2,500
Eliminate balances: intercompany payable against receivable 9,500 9,500
Eliminate trading: revenue against cost of sales 40,000 40,000
Unrealised profit: cost of sales against inventory 2,000 2,000

The unrealised profit is £8,000 × 10,000 / 40,000, which is £2,000, because a quarter of the selling price was Parent’s profit. The group’s inventory falls to its original cost of £6,000. A deferred tax adjustment may also be needed on that £2,000 under Section 29.

What if group companies have different year ends or currencies?

FRS 102 paragraph 9.16 requires the financial statements used for consolidation to be prepared to the same reporting date and for the same period unless that is impracticable. Where a subsidiary’s date differs, the group uses either its last financial statements, adjusted for significant transactions or events up to the parent’s date, provided that date is no more than three months before the parent’s, or interim statements prepared to the parent’s date. Intercompany balances are a frequent source of those significant adjustments, so the reconciliation has to be done at the parent’s date regardless.

For foreign subsidiaries, paragraph 30.22 explains that an intragroup monetary asset or liability cannot be eliminated against its counterpart without showing the effect of currency movements, because it is a real commitment to convert one currency into another. The exchange difference stays in consolidated profit or loss, or in other comprehensive income in the circumstances in paragraph 30.13. Reconcile in the currency of the transaction first, then deal with translation; reconciling translated sterling figures mixes up genuine differences with exchange movements.

Do intercompany balances still appear in each company’s own accounts?

Yes. Elimination happens only in the consolidated accounts. In each company’s individual accounts the balances remain as amounts owed by or to group undertakings. FRS 102 paragraph 33.1A exempts disclosure of transactions between group members under paragraph 33.9, provided any subsidiary party to the transaction is wholly owned; transactions with partly owned subsidiaries still need considering under related party disclosures.

Tax follows the individual companies, not the group accounts. HMRC’s VAT Groups manual at VGROUPS01250 explains that, in most cases, supplies between members of the same VAT group are disregarded, so VAT invoices should not be issued for them and no VAT is charged, with exceptions. Companies outside a VAT group charge VAT on intercompany supplies in the normal way, which is a common source of differences when one side records the gross amount and the other the net. Losses can be shared through group relief, and pricing between group companies can fall within the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010. HMRC’s International Manual at INTM412010 notes that these rules were reformed by Finance Bill 2025 to 26, with draft guidance applying from 1 January 2026, so check the current exemptions before relying on them.

What mistakes come up most often?

  • Forcing the difference. Posting the unexplained difference to a suspense or sundry account on consolidation hides errors that sit in one company’s individual accounts.
  • Eliminating balances but not transactions. Revenue and costs are then overstated even though the balance sheet looks right.
  • Forgetting unrealised profit. Group inventory and profit are overstated whenever goods bought within the group are unsold at the year end.
  • Old untouched balances. Balances carried forward for years with nobody able to explain them often turn out to be errors that also affect the individual accounts.
  • Leaving it to the year end. A monthly routine, built into the month end close, keeps differences small enough to trace.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.