Intercompany Transaction
A financial transaction between entities within the same parent company or corporate group.
What is Intercompany Transaction?
Intercompany transactions are financial dealings — such as sales, loans, royalties, or management fees — between subsidiaries, divisions, or entities that share a common parent. While these transactions may be legitimate for internal resource management, they must be eliminated when preparing consolidated financial statements to prevent overstating revenues, expenses, assets, or liabilities. Transfer pricing rules govern how intercompany transactions are priced to prevent tax base erosion between jurisdictions. Regulators and auditors closely scrutinize intercompany transactions for compliance with arm's-length pricing standards, which require prices to reflect what unrelated third parties would charge.
Example
A U.S. parent company sells inventory worth $10 million to its Irish subsidiary at a transfer price of $12 million. In consolidated statements, both the $12 million intercompany sale and the corresponding purchase must be eliminated — otherwise group revenue is inflated. Tax authorities also review whether the $12 million reflects a fair arm's-length price.
Source: FASB ASC 810 — Consolidation