Intercompany Eliminations and AOC-1: A Practical Guide to Group Accounts

The hardest part of consolidation usually isn't the accounting standards — it's the intercompany transactions. When group companies sell to each other, lend to each other and recharge costs, those amounts have to be removed from the group's figures. If the two sides don't match, consolidation stalls. This guide explains how to get it right.

Why Eliminations Matter

From the group's point of view, a sale from one subsidiary to another isn't revenue — it's money moving within the same economic entity. Without elimination, group revenue, costs, receivables and payables would all be overstated. Eliminations remove:

• Intercompany sales and purchases.
• Intercompany loans, interest, and receivable and payable balances.
• Dividends paid within the group.
• Unrealised profit on stock or assets transferred within the group but not yet sold outside it.

Why the Two Sides Don't Match

• Timing: one company records an invoice in March, the other in April.
• Goods or cash in transit at the year end.
• Different exchange rates used by Indian and foreign entities.
• Disputed or unrecorded recharges.
• Different account classifications.

A Practical Process

1. Agree a group intercompany reporting template, with each company listing balances by counterparty.
2. Confirm intercompany balances at least quarterly, not only at year end.
3. Set a cut-off date for intercompany invoices before the year end.
4. Use agreed exchange rates for foreign-currency intercompany balances.
5. Resolve differences before consolidation, with one side adjusting its books.

Preparing AOC-1

Form AOC-1 is a statement attached to the financial statements, with a part for subsidiaries and a part for associates and joint ventures. For each, it shows figures such as share capital, reserves, total assets and liabilities, investments, turnover, profit before and after tax, proposed dividend and percentage of shareholding. For foreign subsidiaries, the reporting currency and exchange rate are shown too.

Because AOC-1 uses each entity's own figures, it needs their audited or final accounts. Late accounts from a subsidiary delay AOC-1, and therefore the parent's financial statements.

Tips to Avoid Delays

• Set a group close timetable and share it with every entity.
• Make intercompany confirmation a monthly or quarterly routine.
• Ask overseas subsidiaries for accounts early, allowing for their own audit timetables.
• Keep a standing consolidation workbook that carries over from year to year.

Getting Help

Think Filing manages intercompany reconciliations, consolidation and AOC-1 for Indian groups, including those with overseas subsidiaries.