Objective:

This article is in continuation to Part 1 on Consolidation where we learnt basics and we also understood different types of Consolidation methods. In part-2 we will learn about the concept of Elimination entries in Consolidation. Then we will go through Financial Management Consolidation method.

While consolidating, we are required to eliminate the intercompany entries in order to get the correct picture of financials in the form of Balance Sheet as prescribed by the statute of the particular jurisdiction of a particular company/organization.

Let us understand the concept of Elimination entries in detail.

What is Intercompany Elimination?

Intercompany elimination refers to the process for removal of transactions between companies included in a group in the preparation of consolidated accounts. The process of intercompany elimination is helpful in managing eliminations of operations among companies within a single group. Besides, intercompany eliminations encourage and establish controls in multifaceted corporate environments and helps in giving the right picture of financial health of the organisation.

Types of intercompany eliminations

Generally, elimination entries are made for removing the effects of intercompany transactions. There are, basically, three types of intercompany eliminations as follows:

1- Elimination of intercompany stock ownership-

This type of intercompany elimination transaction eliminates the assets as well as the stockholders’ equity accounts for the ownership of subsidiaries by the parent company.

2- Elimination of intercompany debt-

This type of elimination entry is performed when the parent company makes a loan to the subsidiary and the parent company and the subsidiary possess a note receivable and a note payable respectively. In the event of consolidation or amalgamation of two companies, the loan is merely a transfer of cash, and thus the note receivable as well as the note payable is eliminated.

3- Elimination of intercompany revenue and expenses-

The elimination of intercompany revenue and expenses is the third type of intercompany elimination. These intercompany revenues and expenses are eliminated as they are merely transfers of assets from one associated company to another. Moreover, it also does not have any effect on consolidated net assets. Some good examples of intercompany revenue and sales elimination can be indicated by sales to associated companies, interest expense or revenue on loans to or from associated companies, cost of goods sold as an outcome of sales to associated companies, and similar more.

Intercompany elimination entries, therefore, occur in the event of a merger, or when one company absorbs another company. During these processes, it is highly essential to clean up and consolidate the financial accounts and relationships between the two for the sake of legality as well as efficiency.

Let’s understand the concept on-

A) Accounting perspective- Company C needs to consolidate its financial statement which has two subsidiaries Company A and Company B

Company A sells Company B merchandise for $150,000.  The merchandise cost Company A $100,000.  As of December 31, Company B sold all of the merchandise it purchased from Company B to outside parties for $200,000.

Journal Entries in Company A’s Book-

Journal Entries in Company B’s Book-

When all the accounts are transferred to Company C , the final elimination entry in the books of Company C would be

So in the example we can easily see that the final financial statement of Company C would reflect actual position of revenue earned from selling the merchandise outside the company

*Actual Sales- $200000

*Actual Cash Inflow- $200000

*Actual profit earned (Sales-COGS)- $100000

B) Oracle Fusion perspective by considering the following example- Company Apps2fusion Corporation needs to consolidate across its entities worldwide amongst whom the intercompany transactions take place. Apps2fusion Corporation has four entities-

• Apps2fusion USA

• Apps2fusion Canada

• Apps2fusion UK

• Apps2fusion Germany

The four entities have different charts of accounts, calendars and currencies. Apps2fusion Corporation uses secondary ledgers and reporting currencies to align all ledgers to the corporate chart of accounts, calendar, and currency. The Apps2fusion Corporate ledger is an elimination ledger to hold the elimination entries.

Apps2fusion Corporate elimination ledger is used to record elimination entries between all four entities. A ledger set has been created for the five ledgers to enable creation of consolidation reports in Financial Reporting.

Lets take an example of transaction happened between Apps2fusion USA and Apps2fusion Canada : Apps2fusion USA pays 5000 USD to Apps2fusion Canada for aluminium foils

So the Elimination entries would be just reversing those entries-

So on and so forth… Thus we can understand that the actual transaction would be only those which happen with the outside world and not within a company.

Financial Management Integration:

In case of complex consolidation requirements we need to use integration  in order to bring the general ledger balances from Oracle Fusion Accounting Hub to Oracle Hyperion Financial Management, Fusion Edition and perform consolidation in Oracle Hyperion Financial Management. For using this option we need to perform the following task-

• Map chart of account values and hierarchies from Oracle Fusion Accounting Hub to Oracle Hyperion Financial Management, Fusion Edition dimensions.

• Load data from the general ledger balance table to Oracle Hyperion Financial Management, Fusion Edition after performing the Oracle Fusion Accounting Hub chart of accounts to Oracle Hyperion Financial Management, Fusion Edition chart of accounts transformations.

• Perform advanced consolidation in Oracle Hyperion Financial Management, Fusion Edition.

• Drill through Oracle Hyperion Financial Management, Fusion Edition to the Oracle Fusion Accounting Hub balances stored in the general ledger balances table.

Anjan Mukerji

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