Introduction

As a part of your month close checklist in NetSuite, you’ll need to run the Eliminate Intercompany Transactions process. This process allows users to reconcile and eliminate any transactions that occurred between related entities or subsidiaries within the same organization.

In this post, we’ll explore why NetSuite automates this elimination process, as well as identify some common mistakes users make when creating intercompany transactions and look at the elimination entries the system produces for various types of accounts.

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Why does NetSuite automate this process?

In short, NetSuite automates the elimination entries in order to streamline the consolidation process.

The entries are created to exclude intercompany transactions within your accounting group. The calculation of these entries is actually quite complex (which we’ll see shortly), but with the correct system configuration, NetSuite will automate this process for you. Doing so will save you time and will ensure the elimination entries are accurate.

What NetSuite will do when it runs the elimination process is look for any transaction lines in the system that have the “eliminate” checkbox checked and process those for elimination against the respective elimination entity.

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Common Mistakes

Let's explore some of the common mistakes made when working with intercompany transactions.

The first mistake that many companies make is not setting up elimination subsidiaries. Now, you need to establish an elimination subsidiary for each reporting group that requires separate consolidated financial reports. And yes, you can have multiple elimination entities in your NetSuite environment. Let's jump into NetSuite to take a closer look.

Below we have our list of NetSuite subsidiaries. Notice in this case we have an elimination entity confirmed here in the elimination column for our ultimate parent because we are required to prepare consolidated financial statements at the ultimate parent entity level. In addition, notice we have an elimination entity for our EMEA Group of Companies, again confirmed with elimination is “yes”.

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That's because, in this case, our EMEA group requires separate consolidated financial reports. Notice that for North America, we do not have an elimination entity because in this case our North America group does not require separate financial reporting at the consolidated level.

The second mistake many users make has to do with incorrect General Ledger account configuration. Specifically, all intercompany GL accounts should have the checkbox Eliminate Intercompany Transactions checked. This will ensure that any related transactions using this GL account will be subject to elimination. Let's confirm that checkbox in NetSuite.

Below is an example of an intercompany GL account as per the name, and it's a child of the intercompany receivable GL accounts. Notice that the Eliminate Intercompany Transactions checkbox is checked. Again, this is critical to ensure that any transactions posted to this account eliminate on consolidation.

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A third mistake that’s often made is when advanced intercompany journal entries are not used to establish the opening balances within a given NetSuite environment. If that’s not done, then all of your intercompany balances will not eliminate on consolidation and your financial statements will be incorrect from the get-go.

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Accounts at Current Rate

Now that we’ve seen some common mistakes made when working with intercompany transactions, let's explore the calculation of the elimination entries for accounts that are measured at the current rate.

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These entries are created based upon the cumulative balance in each intercompany GL account that is measured at the current rate. Remember: This is going to be the vast majority of your balance sheet accounts. These entries are created for each elimination entity, and they are auto reversed. In other words, the initial entry that's created for an accounting period is then going to be reversed in the following accounting period automatically. In a way, this is really similar behavior to that of the revaluation of foreign currency balances.

Let's take a look at an example of an elimination entry that has been posted for GL accounts measured at the current rate.

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Taking the top line in the image above, in our Canadian entity that's measured in Canadian dollars (CAD), we have a balance as of the end of the period of CAD $1,000,000.

Now, our ultimate parent entity in this case is measured in US dollars (USD), so we need to convert this CAD $1,000,000 into USD. We do that by applying the appropriate consolidated exchange rate. In this case, it will be the consolidated exchange rate for the current rate between CAD and USD to give us an equivalent balance. We then apply that same logic for all intercompany balances during that period end, so the next one is the North America parent entity that's measured in USD. We're converting USD to USD, so there's no change there. For Japanese yen (JPY), it's exactly the same; we take our JPY balance at the end of the period, and we apply the consolidated exchange rate to give us the equivalent balance.

Notice that the final line on the elimination journal entry will post to the CTA-Elimination account. This is really a catch-all for the difference between all of the balances measured at the current rate that have been converted to the consolidated functional currency—in this case, of USD.

Let's validate that in NetSuite. Below is the exact journal entry that we were just referencing.

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Notice, in this case, that the journal entry needs to balance. So, the amount that's posted to the CTA-Elimination account is the delta. That delta is driven by exchange rate movements from period to period. Remember that the journal entry is posted in the system for the given accounting period, and is then reversed in the following period. Notice that this entry here has been posted in February 2023, and it has been reversed in March 2023. You'll notice that all of the debits and credits have been flipped.

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Accounts at Average Rate

Let's look now at the calculation for accounts measured at the average rate.

Elimination entries are created based upon transaction totals for that accounting period for each intercompany GL account that is measured at the average rate, which will be accounts on your income statement. They are created for each elimination entity, and are not reversed, which differs to accounts measured at the current rate. In other words, each balance is fully eliminated in the period in which it is established, which means there are no balances carried forward. Let’s take a look at an example.

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In this example, we are looking at accounts measured at the average rate for our UK entity. Notice our UK entity has a functional currency of GBP, and the parent entity that we are rolling up to in this case also has a functional currency of GBP.

What does that mean? Well, when we are carrying forward account balances in GBP, the consolidated exchange rate will be 1. So, our consolidated balance to eliminate will be the same amount in our UK entity. What that means is we will have occasions when we are eliminating certain transactions in NetSuite where no CTA-Elimination balance is generated. You might recall that the CTA-Elimination balance is the delta to ensure that the journal entry will balance. In this case, the CTA-Elimination amount is 0 because the journal entry balances as we're debiting and crediting the same value in GBP.

One other thing to note is that accounts measured at the average rate and the historical rate are actually combined into a single elimination entry because they're both treated in the same way for elimination purposes, where we reference the balances generated in a specific accounting period and then eliminated in that same accounting period. Below is a specific example in NetSuite.

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Here we have that exact example we were just looking at. We have the debit and credit of GBP £1,000,000, and the other balances reference the historical accounts. We'll take a look at those next.

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Accounts Measured at Historical Rate

As for accounts measured at the average rate, accounts measured at the historical rate produce elimination entries based upon transaction totals for that specific accounting period for each intercompany GL account measured at the historical rate. Again, they are created for each elimination entity, and they are not auto-reversed.That means there's no carried forward balance. Let's take a look at an example.

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In this example, notice that we have a balance within our French entity measured in Euros. In this case, it's an intercompany capital balance with a Euro balance of EUR €1.266 million. That balance is measured by multiplying against the historical consolidated exchange rate for that currency pair of 0.789 to produce a GBP equivalent just shy of GBP £1,000,000. Notice in this case the offset to this balance is directly against the CTA-Elimination account.

Now, you might wonder, why would such a large balance be posted to the CTA-Elimination account? The reason for that is the offset to this intercompany transaction is against an account measured at the current rate. As we know, accounts measured at the current rate will be eliminated via a separate journal entry in NetSuite. So that journal entry will include an offset to the CTA-Elimination account. That's why we see such a large balance here for the historical elimination journal entry.

We can see that here:

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For journal entry 146 (this is the elimination entry we were just looking at), note that it does combine with accounts measured at the average rate. On the other side, for journal entry 144, this is the entry for accounts measured at the current rate.

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Notice that GBP £1,000,000 in account 1602 is offset against the CTA-Elimination account, so we end up with a net balance of GBP £27 posted to the CTA-Elimination account, which is much more reasonable.

Another important thing to note is that you can quickly refer to historic intercompany elimination entries for accounts that are measured at both the average and historical rate by referencing a canned report within NetSuite. Let's navigate there now.

If you go to Reports > Financial > Intercompany Elimination, you can run a report in the system with all of the historic intercompany elimination journal entries that the system has generated.

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In this case, we can see for our elimination entity in USD we have an elimination entry 147 that eliminates a number of intercompany balances in the January period. Likewise, for our EMEA entity which is eliminated in GBP, we have journal entry 146 that is also posted in January 2023. So, this report will be very helpful when you are looking to track these historical elimination entries.

Note that the accounts measured at the current rate are not included here. The reason for that is that those entries are posted in one accounting period and reversed the next. You would just see in and out on this report which wouldn't be very helpful.

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Summary

In this post, we learned why NetSuite automates the elimination process, and we looked at some of the common mistakes related to the intercompany configuration in NetSuite. In addition, we looked at some of the detailed calculations behind the elimination entries that the system calculates. We learned how the different GL accounts are treated for elimination purposes, and we also looked at some of the unique scenarios that can arise when you run the process.

You should now have a better understanding of the Eliminate Intercompany Transactions process and how it functions when completing your month close checklist.