Consolidation and Intercompany Eliminations: A Worked Example With Goodwill and NCI

Consolidation combines the financial statements of a parent company and the subsidiaries it controls into one set of group statements, as if the group were a single company. Intercompany eliminations are the adjustments that remove transactions and balances between group members, so the group does not report revenue it earned from itself, debts it owes to itself or profit on goods that never left the group.

This guide walks through a complete consolidation of a parent and an 80% owned subsidiary, step by step, with every elimination entry and a worksheet that balances. It is written for finance leads at small and mid-sized groups who prepare consolidated statements in a spreadsheet from each entity's books.

#Consolidation at a glance

#What is consolidation in accounting?

Consolidation is the process of presenting a parent and its subsidiaries as one economic entity. You start from each entity's own trial balance or statements, add them together line by line, and then post adjustments that exist only at group level.

Two points surprise people the first time:

1. You add 100% of a subsidiary even if you own 80% of it. The 20% that belongs to outside shareholders is shown separately as non-controlling interest (NCI) in equity and as a share of profit.
2. Eliminations are never posted in the subsidiaries' books. Each company keeps its legal ledger. The adjustments belong to the consolidation worksheet, which is why separate, clean books per entity matter so much. The multi-entity accounting guide explains how to structure them.

#When does a parent have to consolidate a subsidiary?

A parent consolidates an entity when it controls it. Under IFRS 10, control has three elements: power over the investee's relevant activities, exposure or rights to variable returns from it, and the ability to use that power to affect those returns. Owning a majority of voting rights usually gives control, but contracts, potential voting rights and de facto control can create it below 50%.

US GAAP reaches a similar answer through two models in ASC 810: the variable interest entity (VIE) model, which asks who is the primary beneficiary, and the voting interest model for everything else. The IFRS vs US GAAP guide compares the two approaches.

Associates (significant influence, usually 20% to 50%) are not consolidated. They are accounted for with the equity method under IAS 28 or ASC 323, so their revenue and balances never enter the group lines.

#What gets eliminated on consolidation?

IFRS 10 (paragraph B86) requires intragroup assets and liabilities, equity, income, expenses and cash flows to be eliminated in full. In practice that means six families of entries:

#A worked consolidation example

Northwind Holdings (the parent) bought 80% of Harbor Supplies on 1 January 2025 for 640,000. On that date Harbor's equity was 700,000 (share capital 300,000 and retained earnings 400,000), and the fair value of its identifiable net assets equalled their book value. Both companies report in the same currency and close on 31 December. We prepare the consolidated statements for the year ended 31 December 2026.

#Step 1: calculate goodwill and NCI at acquisition

Northwind measures NCI at its proportionate share of net assets.

If Northwind had chosen to measure NCI at fair value (say 155,000), goodwill would be 95,000 and NCI 15,000 higher. IFRS 3 allows either choice for each acquisition. US GAAP (ASC 805) requires NCI at fair value, which gives the "full goodwill" figure.

#Step 2: list the intercompany transactions for 2026

Before any worksheet, collect every transaction between the two companies and confirm both sides agree:

• Harbor sold goods to Northwind for 90,000 at a 25% markup on cost (cost 72,000, profit 18,000).
• At year end Northwind still holds 30% of those goods: 27,000 at transfer price, containing 5,400 of Harbor's profit.
• Northwind owes Harbor 15,000 for the last delivery.
• Northwind lent Harbor 100,000 at 6%, so Harbor paid 6,000 of interest.
• Harbor declared and paid a dividend of 50,000: 40,000 to Northwind and 10,000 to the outside shareholders.
• Harbor earned 60,000 in 2025 and paid no dividend that year.

Tip: This list is the real work of consolidation. If Northwind recorded the purchase at 89,400 or Harbor forgot the interest invoice, every later step is wrong. That is why automating the second side of intercompany entries pays off; see the intercompany automation guide.

#Step 3: the individual income statements

#Step 4: post the income statement eliminations

E1 removes the sale entirely. E2 then puts back the 5,400 of profit that is still sitting in Northwind's inventory: the group only earns it when the goods are sold to an outside customer.

#Step 5: the consolidated income statement

A quick proof: 216,000 plus 84,000 is 300,000; remove the intragroup dividend (40,000) and the unrealised profit (5,400) and you get 254,600. Interest nets to zero.

#Step 6: split profit between the parent and NCI

Because the sale was upstream (subsidiary to parent), the unrealised profit sits in Harbor's result, so NCI bears its share of the adjustment:

• Harbor's adjusted profit: 84,000 minus 5,400 = 78,600
• NCI share (20%): 15,720
• Profit attributable to owners of Northwind: 254,600 minus 15,720 = 238,880

For a downstream sale (parent to subsidiary), the whole unrealised profit would come out of the parent's share and NCI would be unaffected.

#Step 7: the consolidated balance sheet

Individual balance sheets at 31 December 2026:

Harbor's retained earnings moved from 400,000 at acquisition to 494,000 (plus 60,000 in 2025, plus 84,000 in 2026, minus the 50,000 dividend), so 94,000 is post-acquisition.

Balance sheet eliminations:

The consolidated balance sheet:

NCI rolls forward cleanly: 140,000 at acquisition, plus 12,000 (20% of 2025 profit), plus 15,720 (2026 share), minus the 10,000 dividend, gives 157,720. When your roll-forward agrees with the worksheet, the consolidation is internally consistent.

#Unrealised profit: upstream vs downstream

Unrealised profit is profit one group company has recorded on goods or assets still held by another group company. It is removed because, from the group's point of view, nothing has been sold.

The same logic applies to fixed assets transferred at a profit: eliminate the gain, then add back the extra depreciation the buyer charges each year until the asset is fully depreciated.

#Why don't intercompany balances agree?

Mismatched intercompany balances are the most common reason a consolidation does not balance. The usual causes:

1. Timing. The seller invoices on 31 December, the buyer receives the goods on 2 January and books the purchase then.
2. Goods or cash in transit. A payment leaves one bank on the 30th and arrives on the 1st.
3. Different exchange rates. One side books at the invoice-date rate, the other at the payment-date rate. The multi-currency accounting guide shows how to keep rates consistent.
4. One side never booked it. Management fees and cost recharges are the classic examples.
5. Different accounts. The seller uses intercompany receivables, the buyer uses ordinary trade payables, so the reconciliation report misses it.
6. Disputes. The buyer rejected part of a delivery and issued a debit note the seller has not accepted.

Agree a cut-off rule, use dedicated "due from" and "due to" accounts per counterparty, and reconcile monthly rather than at year end. The month-end close checklist puts that reconciliation on day two of the close.

#How to prepare consolidated financial statements step by step

1. Confirm the group structure, ownership percentages and which entities are controlled.
2. Align accounting policies, reporting dates and the chart of accounts mapping across entities.
3. Translate any foreign subsidiary into the presentation currency (IAS 21, ASC 830).
4. Reconcile every intercompany balance and transaction pair and fix differences at source.
5. Export each entity's trial balance and add them in the worksheet.
6. Post the investment elimination, goodwill and NCI at acquisition.
7. Eliminate intercompany sales, balances, loans, interest and dividends.
8. Remove unrealised profit in inventory and on transferred assets.
9. Allocate post-acquisition profit and reserves between the parent and NCI.
10. Check that the worksheet balances, roll forward NCI and goodwill, and draft the group statements.

#How Ledgeriano helps with consolidation

Ledgeriano does not produce consolidated statements automatically. What it does is take care of the inputs that make consolidation slow:

• Separate, complete books per entity. Each subsidiary is its own business with its own base currency, chart of accounts template (IFRS, US GAAP, European PCG, GCC IFRS or small business) and fiscal years. See features.
• Matched intercompany entries. A workflow creates the purchase in the buyer the moment the seller posts the sale, with the same amount and party codes, so step 4 above becomes a check rather than an investigation.
• Statements and trial balances per entity with prior-year comparison and CSV export, ready to paste into the worksheet. Through the accounting API you can pull trial balances for every entity into your own consolidation file or script.
• Lock dates per entity so nobody changes a subsidiary's numbers after the group pack is assembled.

If your group needs automated eliminations, translation of dozens of subsidiaries and statutory consolidation packs, a dedicated consolidation tool on top of clean entity books is the right call. For a group of two to ten companies, a well-designed worksheet fed by reliable entity ledgers is usually enough.

#Common consolidation mistakes

• Eliminating only the parent's share of intercompany sales. Eliminate 100%; NCI is dealt with separately.
• Forgetting to reverse last year's unrealised profit when the goods are sold this year.
• Posting eliminations into a subsidiary's legal ledger, which corrupts its own statements.
• Leaving pre-acquisition reserves in group retained earnings.
• Ignoring intercompany items in the cash flow statement: intragroup loans and dividends must come out there too.
• Using different fiscal year ends without adjusting for significant transactions in the gap (IFRS 10 allows a difference of up to three months).