There is an elimination where automation becomes especially handy because part of the elimination bookings typically lasts for years. Profit on fixed assets emerges when some fixed asset – tangible or intangible – is sold by one group company to another for a higher price than the book value in seller’s books is. The asset stays the same, so the higher selling price must be eliminated from the group’s figures. One element to eliminate is the intergroup profit and the other is the overstated assets and too high depreciation.
The elimination contains two parts: the easier to handle and shorter in duration is the elimination of the profit the seller makes. This you need to eliminate from income statement against retained earnings during the year when the transfer happens. In the following years, the elimination entry in the retained earnings zeroes out the one from the income statement.
The second part of the elimination is the more complicated one: it touches more accounts, lasts for years, needs to stop promptly etc. It’s adjusting the value of the asset and the depreciation. This is necessary since the buying entity values the asset based on the price which contains profit and depreciates that value. From the group’s perspective it’s too high because of the profit.
The adjustment of the asset value is done best by the group headquarters since the buyer usually does not know the profit. The information needed for the adjustment includes the amount of the profit, the useful life of the asset and the depreciation method. Automating fixed asset elimination saves you from making journal eliminations every month. It also provides a central register of the fixed assets sold at profit which can be then viewed with reports etc.
A major challenge lies in managing the elimination over time, though. The additional information for the elimination needs to be kept up to date with structural changes of the group and any changes the unit makes to the value of the asset like impairments. These need to be reflected in the additional information in order for the elimination to work correctly.
This requires communication routines and processes between the entity holding the asset and the group. Also, in a re-organisation situation the profit on fixed assets to be eliminated needs to be treated and converted into the new location according to the underlying assets.