Eliminations
Overview
Financial transactions involving a parent and one of its subsidiaries or between two of its subsidiaries are intercompany transactions. In preparing consolidated financial statements, parent companies remove the effects of intercompany transactions by making elimination entries. Elimination entries allow the presentation of all account balances as if the parent and its subsidiaries were a single economic enterprise. Elimination entries appear only on a consolidated financial statement, not in the accounting records of the parent or subsidiaries.
Objectives
By the end of this chapter, you will be able to:
- Explain how eliminations impact consolidated reporting.
- Understand the type of activity that firms commonly eliminate.
- Define Workday elimination rules.
Eliminations Overview
Workday supports automatic, real-time eliminations in financial reporting. Elimination entries, referred to as intercompany eliminations, allow the presentation of all account balances as if the parent and its subsidiaries were a single economic enterprise. Workday performs eliminations by removing (i.e., eliminating) any transactions between affiliated entities.
Example
: GMS, USA loaned $1 million to Green Planet Solutions. Both companies are subsidiaries in the same company hierarchy. The accountant for the company hierarchy consolidates the two for financial reporting purposes. An outside financial statement user evaluating the financial statements for the consolidated company wants access to clear data that reports the overall performance of the consolidated company.In order to report clear, accurate data, you must eliminate intercompany transactions such as the loan from GMS, USA to Green Planet Solutions. Eliminating transactions that occur between affiliated companies prevents the overstatement of revenues, expenses, assets, and liabilities.
The three most common types of intercompany eliminations are:
- Intercompany revenue and expenses
- Intercompany debt
- Intercompany stock ownership
Example transactions include:
- Sales to affiliated companies
- Cost of goods sold as a result of sales to affiliated companies
- Interest expense or revenue on loans to or from affiliated companies
- Rent or other revenue received or paid for services rendered to or received from affiliated companies
- Fixed assets sold or leased to affiliated companies
Intercompany debt results in offsetting payables and receivables when one company lends money to another affiliated company. The loans are merely a transfer of cash; therefore, the payable and the receivable between the affiliated companies eliminates in consolidation.
Intercompany stock ownership is eliminated by eliminating the Investment in Subsidiary account against the stockholders' equity accounts of the subsidiary.
Note
: There are also equity accounts of a subsidiary that represent income but do not appear on the income statement. We generally call them other comprehensive income on the balance sheet. Examples are currency translation and unrealized gain/loss on investments such as marketable securities. We often include these accounts when calculating noncontrolling interest and equity pickup.Eliminations in Workday
The consolidation process can be a complex task. Accountants often complete the consolidation process using spreadsheets. As such, they create consolidated financial statements only when absolutely necessary. Workday financial reporting makes this daunting task quick and efficient, letting users create consolidated financial statements on demand. With elimination configuration in Workday, there is no need to have an elimination entity. Workday accomplishes elimination calculations by the use of the company and intercompany affiliate worktag types on a transaction. Users can consolidate the financial results of companies within a company hierarchy and run eliminations automatically in Workday financial reporting. Users can quickly and automatically eliminate intercompany entries like the loan from GMS, USA to Green Planet Solutions.
Important
: Note that Workday does not store or persist eliminations. Workday processes eliminations in real time and makes them available for reporting only.Elimination Rules
Users define elimination rules for an account set and Workday applies the rules to all companies that share the account set.
Elimination rules define what Workday eliminates and how it calculates eliminations. The following three tabs are on the
Maintain Elimination Rules
task page:- Intercompany/Interworktag
- Noncontrolling Interest Activity
- Equity Pickup
Chapter Summary
Configure elimination rules for intercompany transactions so Workday properly calculates eliminations. The most common intercompany eliminations are sales and expenses and receivables and payables.