It is necessary to eliminate existing transactions between companies in the group as they represent mere resource transfers and don’t imply concrete variations within this context.
This is because the consolidated financial statement should express the result for the period and working capital of the group as a single economic entity.
The first problem that can occur is related to the incomplete correspondence of balances in the various companies in the group (reconciliation).
It is necessary to distinguish between deletions of balances that have no effect on revenue and group capital with deletions of balances that do have an effect.
The following are the ones that do not have an effect on group capital and revenue:
The following are the ones that do have an effect on group capital revenue:
In the scope of the methodology applied to integral purchase acquisition, the elimination of intergroup balances must be made in full regardless of participation percentages.
This rule is based on the general principle that an economic entity cannot generate a profit through a transaction with itself. Therefore, any gain or loss arising from exchanges of goods within the group – which are still active by the end of the purchasing company’s financial year – must be eliminated, even if the sale was made at market prices.
The law provides two exceptions to the general principle.
Issues related to the presence of the Institution of depreciation;
In the case of a transfer with registration of capital gain from the receiving party, it is necessary to eliminate profits and rectify in decline the depreciation rate calculated on a higher historical cost.
NB: the divergence problem of depreciation rates between buyer and seller.
If the transfer of goods is made for a lower amount, the loss has to be eliminated and the values of assets and depreciation must be restored (it is also possible to avoid rectifying in order to be on the safe side).