IFRS 16 in consolidated accounts: Intercompany leases & elimination entries

IFRS 16 is more complex in consolidated accounts, with intercompany leases, elimination entries, and differences between local GAAP and IFRS. But with proper system support, you gain better control of lease contracts – as well as more reliable group reporting. 

For a stand-alone company, IFRS 16 is demanding. In a group, it is even more challenging: the same lease can create income and expenses in two places, balance sheet right-of-use (ROU) assets and lease liabilities must be eliminated, and subsidiaries may report under local GAAP. Intercompany leases can inflate the balance sheet, affect EBITDA and covenant calculations, and lead to unnecessary audit rounds.

That is why this topic requires clarity, speed, and precision. It is about choosing the right methodology and tools. And the question is broader: IFRS 16 in a group is not just about maintaining a lease register. In addition to ensuring accurate consolidated figures, you can achieve measurable business benefits. With full control of your leases, you get better management information and more discipline across the group.

Why IFRS 16 becomes more complex in groups

In a group structure, leases flow across legal entities. A parent company may own assets that subsidiaries “lease.” Or a service entity may be the external counterparty, re-invoicing the costs internally.

What is correct reporting in a subsidiary is not necessarily correct in consolidation. Without a clear process for identifying and classifying intercompany leases, it is easy to overstate assets, liabilities, interest, and depreciation – and misstate profit.

CFOs and group controllers therefore need a framework that begins with visibility: Where are the contracts? Which are true lease contracts under IFRS 16? How are they eliminated consistently over time and across the group? And how do we document decisions so that audits run smoothly?

Identifying intercompany leases: Detect and classify contracts

The first step is to put everything on the table. In practice, this means compiling data from contract archives, ERP, fixed asset registers, and intercompany balances. Many discover hidden “contracts” that are in reality cost allocations, or formal agreements that were never registered in a central system.

The core challenge is classification: Is this a lease under IFRS 16 – an identified asset, a right to control its use for a defined period, in exchange for consideration? For intercompany leases, the answer is often yes in the stand-alone accounts, but in the consolidated accounts the effect must be eliminated. The conclusion must be documented, and the data quality must be high enough to ensure the elimination entries hit correctly.

Precision in terminology helps: right-of-use asset, lease liability, discount rate, variable lease contract, options, and residual values. All of these must be consistently defined and applied. This reduces errors and misunderstandings when preparing consolidation adjustments.

Step-by-step elimination: Remove intercompany leases in consolidation

The mechanics of consolidation are straightforward to describe but require discipline to execute. The principle is simple: the effects of intercompany leases must not affect the group’s profit, balance sheet, or cash flow. The process can be described as follows:

1. Eliminate income statement items. Remove intercompany lease income in the lessor and lease expenses in the lessee, including interest and depreciation related to the intercompany lease.
   
   
2. Eliminate balance sheet items. Remove right-of-use assets and lease liabilities arising from intercompany leases; also adjust any related deferred tax if relevant.
   
   
3. Ensure consistency and audit trail. Reconcile with intercompany balances, ensure the elimination entries affect both profit and balance sheet consistently, and document the logic so it can be repeated and audited.

What creates friction is often timing and granularity: When are adjustments booked? At what level (for example, subgroups)? How are changes during the year handled – re-negotiations, index adjustments, or reassessments? This is where strong processes and system support make the difference.

Local GAAP vs IFRS: Practical approaches

Many subsidiaries report locally under accounting frameworks that differ from IFRS 16. This may involve definitions, measurement, discount rates, or presentation. The parent company must therefore translate local figures into IFRS before consolidation.

The best starting point is a standardized “bridge” from local GAAP to IFRS, with clear transformation rules for each category and contract type. In practice, automation has the greatest effect here: when subsidiaries record contracts in a structured way – even if they report locally – the parent can generate consistent IFRS consolidation adjustments in one flow. This reduces manual errors, saves time, and simplifies the audit process.

Consolidation checklist: What to reconcile each period

• Do we have complete visibility of all intercompany leases and contract changes since the last reporting period?
  
  
• Are the contracts correctly classified, with decisions documented against clear criteria?
  
  
• Have elimination entries been made in both the income statement (lease, interest, depreciation) and balance sheet (ROU asset, lease liability)?
  
  
• Have local GAAP vs IFRS adjustments been identified, translated, and made traceable in the consolidation process?
  
  
• Is the process, assumptions, and documentation available in one place for auditors?

Example: Parent and subsidiary with intercompany lease

Consider a parent company that owns an office building. The subsidiary has a five-year lease, indexed annually, with an option to extend for two years. In the subsidiary, this is an IFRS 16 lease with a right-of-use asset and a lease liability.

We start by eliminating the accounting effects. In the parent, lease income is recognized, and the building is depreciated as usual. In the consolidated accounts, the effects of the intercompany lease must be removed. In the income statement, both the lease income in the parent and the lease expense in the subsidiary are eliminated, as well as interest and depreciation related to the subsidiary’s ROU asset.

Next comes the balance sheet. The subsidiary’s ROU asset and lease liability are eliminated, and the parent’s underlying asset remains – so that the group reflects the actual ownership.

Finally, other considerations: If the contract is re-negotiated during the year, new cash flows and discount rates must be updated – both in the subsidiary and in the elimination entries. A good solution lets you simulate the effect before locking the numbers.

Best practices: Documentation, system support, and internal controls

CFOs who succeed in both compliance and adding business value typically share three practices. First, they set documentation standards: definitions, checklists, assessment templates, and a complete audit trail that shows how contracts have developed over time.

Second, they establish system support that makes it possible to move from contract registration to consolidation-ready figures without manual shortcuts. Third, they build internal controls into the process. This means clear roles, approvals for changes, and alerts when data is missing or inconsistent.

A real-world example: This is how the Norwegian software giant Visma consolidates IFRS 16 leases across 170 companies.

With good system support, you have a single place to register leases with all IFRS 16 parameters, simulate contract changes, handle renegotiations and index adjustments, and produce reports that are ready for consolidation. Such a solution provides traceability from contract level to consolidation adjustments, and it makes it easier to work with auditors because everything is documented.

Speaking of auditors, they will typically test two things: that your methodology is sound, and that you apply it consistently. They will look at how you define intercompany leases, whether discount rates are reasonable, how you treat options, and how you document changes. The simplest answer is strong systematics: when assessments, calculations, and elimination entries are done in the same tool, with the same rules, both control and compliance become much easier.

The payoff: More than compliance

When intercompany leases and IFRS 16 processes are in place, two things happen. First, the group’s figures are more accurate – a value in itself. Second, management information improves: you see which assets and contracts drive costs, you can assess duration and flexibility of the portfolio, and you can make better investment decisions. IFRS 16 becomes a management tool, not just a reporting obligation.

IFRS 16 in groups will always be more demanding than in smaller stand-alone companies, but it does not have to be complicated in practice. With a clear process for identification and elimination, precise handling of local GAAP vs IFRS, and a system that connects it all, you achieve accurate figures, faster closing, and a smoother audit.

Want to see how House of Control can streamline IFRS 16 in your group – from contract registration to consolidation adjustments? We’ll show you how to cut manual work, reduce risk, and give management better insights.