One group, many ledgers
A group with four ledgers in four currencies does not have four sets of results. It has one — once every entity is restated in a single currency and everything the group sold to itself has been stripped out. Skip that and revenue is overstated while profit looks untouched; price the internal charges carelessly and the tax lands in the wrong country.
The mechanics have not changed in decades. The timing has. AI can now match intercompany across ledgers and currencies as it is booked, propose the eliminations, and watch transfer-pricing margins against the arm’s-length range all month — so the year-end true-up stops being a surprise. Move the mark-up, the loan and the exchange rate, and watch profit, and tax, move between countries.
Three stances · group tax rate
HoldCo’s central services, recharged to the three operating companies at cost plus this mark-up.
Convert HoldCo’s £15.0m loan to Mexico into equity. Interest stops.
Moves every other currency together. A stronger EUR shrinks what is earned elsewhere, and reprices charges set in another entity’s currency.
VerdictNeeds attention
Added together, the four ledgers overstate group revenue by €16.6m — 22% too high.
Profit before tax is identical either way: intercompany sales, fees and interest cancel inside the group. Post the eliminations before anyone reads the top line.
Group structure · intercompany
Four ledgers, four currencies. Select a flow for detail.
- Intercompany flow, width = value
- Eliminated
- Loss-making
HoldCo25%
UK · GBP
€1.2m
OpCo25%
ES · EUR
€8.2m
Sub21%
US · USD
€2.6m
Sub30%
MX · MXN
€497k
Boxes show profit before tax in the group currency and each entity’s illustrative tax rate.
Top line, by counterparty
Ledgers summed
Group revenue
€91.1m
ledgers summed: overstated
Overstatement
€16.6m
22.2% too high if intercompany stays in
Group EBITDA
€12.5m
16.7% margin, eliminated or not
Effective rate
24.4%
€3.0m of tax at illustrative rates
Consolidation worksheet
Translated at average rates · eliminations in blueScroll sideways for the eliminations and the group column.
| EUR millions | HoldCo UKGBP @ 1.1759 | OpCo ESEUR @ 1.0000 | Sub USUSD @ 0.9259 | Sub MXMXN @ 0.0509 | Eliminationsnot posted | Groupaggregated |
|---|---|---|---|---|---|---|
| Revenue | 4.06 | 46.50 | 27.78 | 12.72 | (16.56) | 91.06 |
| Cost of sales | – | (27.00) | (14.02) | (7.30) | 12.50 | (48.32) |
| OpexOperating expenses | (3.94) | (9.50) | (9.72) | (3.05) | – | (26.21) |
| Mgmt feesManagement fees | – | (1.83) | (1.42) | (0.81) | 4.06 | (4.06) |
| EBITDA | 0.12 | 8.17 | 2.61 | 1.56 | – | 12.47 |
| Interest income | 1.06 | – | – | – | (1.06) | 1.06 |
| Interest expense | – | – | – | (1.06) | 1.06 | (1.06) |
| Profit before tax | 1.18 | 8.17 | 2.61 | 0.50 | – | 12.47 |
| TaxTax · illustrative | (0.30) | (2.04) | (0.55) | (0.15) | – | (3.04) |
Average rates, 1 EUR = 0.8504 GBP · 1.0800 USD · 19.66 MXN. Illustrative, not market rates.
Illustrative statutory rates: UK 25% · Spain 25% · US 21% (federal only) · Mexico 30%. Not tax advice.
Notes on the model
What it shows
- Eliminations change the top line, not the bottom line. Intercompany revenue and cost cancel, so a simple sum of ledgers overstates revenue while profit before tax is identical.
- On routine services, the mark-up moves profit between countries far more than it moves tax. The group rate only jumps when an entity tips into loss and its deduction goes unused.
- Capitalising a loan is a tax decision as much as a treasury one: interest stops, profit stays with the borrower, and the group pays that country’s rate instead.
- Exchange rates reach past translation. Charges priced in one entity’s currency move another entity’s own local profit.
How it works
- Four illustrative local-currency P&Ls. HoldCo recharges central services at cost plus the mark-up on fixed allocation keys; Spain sells product to the US and Mexico; HoldCo lends to Mexico.
- Each ledger is translated at an illustrative average rate into the currency chosen at the top of the page. The shock moves every other currency against it at once.
- Intercompany revenue, cost of sales, fees and interest are eliminated in full. Tax is each entity’s profit before tax at an illustrative headline rate, with no relief for losses.
- Outside the shaded bands, tax at risk is the extra tax due if the paying country disallows the excess deduction, or the lender’s country adds back the shortfall, after any loss the adjustment would absorb.
What it leaves out
- Illustrative figures and rates, not tax advice. US tax is federal only; state taxes, withholding tax, interest caps and thin-capitalisation rules are ignored.
- P&L only: no balance sheet, closing rates, translation reserve or minority interests, and no unrealised profit in stock — all intercompany goods are sold on within the year.
- Intercompany is booked and translated at the same rate, so eliminations net exactly. In real ledgers, timing and rate differences leave a residual someone has to explain.
Next experiment · 06
Quality of earnings
From reported to adjusted EBITDA, with machine-flagged anomalies and an earn-out that has to hold.
Normalise the earningsUsing this on a real decision?
Talk it through
The defaults are illustrative. The inputs that decide the answer are the ones you only know from inside the business.
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