Intercompany eliminations

Definition

Many dairy operations are several legal entities under common ownership: a dairy, a farming company that grows feed, a cattle or heifer-raising company, a land or equipment company. They sell to and owe each other. An intercompany balance is a receivable or payable between two of these related entities.

An intercompany elimination removes those balances (and the matching sales, purchases and transfers) when the entities are combined, so the combined statements show only dealings with outside parties. Without it, the same dollar shows up as one entity’s receivable and the other’s payable, and combined revenue and expense are inflated by internal sales.

Lenders apply the same idea to collateral:

Eligibility: a receivable owed by a related entity is not eligible collateral, even when the borrower reports each entity separately. It is not a third-party claim the lender could collect.
Combined borrowing base: when several entities are co-borrowers, the intercompany receivable and payable are both removed from gross, so A/R is not counted and A/P is not deducted for the same internal debt.

Accrued-interest offset

A related case: the lender’s interest bill can appear in A/P while the same accrued interest is already in the loan position. It is removed from A/P so it is not deducted twice. This is not an intercompany item but is usually handled on the same adjustment schedule.

How to pull it in DC305

DC305 is not the source. It holds no receivables, payables or entity ownership.

Use the accounting system for each entity:

Tag every customer and vendor that is a related entity.
Pull the aged detail as of period end for each entity and filter to the tagged names.
Match each pair: entity A’s receivable from B against B’s payable to A.

Cattle moved between entities (e.g. calves to a heifer raiser, springers back to the dairy) appear in DC305 as transfers or as sale and purchase events, depending on whether the entities share one herd file. Those head movements belong in the herd inventory roll-forward; the dollar balances they create belong on this schedule.

Typical range

Herd context: multi-entity US dairy operations reporting to ag lenders on a combined or co-borrower basis; treatment varies by lender and loan agreement.

Matched pairs should net to zero: entity A’s receivable from B equals B’s payable to A at the same date. Any difference is a timing or posting difference to explain.
Eligible intercompany A/R: zero under standard lending practice.

Common mistakes

Eliminating one side only. Removing the receivable but leaving the payable understates the base (or vice versa).
Unmatched pairs. One entity booked the invoice in the period and the other booked it the next month. Reconcile pairs before eliminating.
Different as-of dates across entities.
Missing a related party that is not obviously named, such as a family member’s company or a jointly owned entity. Keep the related-party list current.
Treating cattle transfers as third-party sales in a combined roll-forward; they are transfers between entities, not sales out of the group.
Forgetting the accrued-interest offset and deducting the lender’s interest twice.