4 best practices for handling intercompany transactions

Published on: May 18, 2021

Intercompany transactions often result in cumbersome workloads for accounting teams. A fact that is as true for smaller organizations as it is for global corporations. Rarely does the size of your company dictate the level of complexity faced once intercompany transactions enter the equation. The best practices presented below are essential for companies of all sizes and help teams reduce the complications of transactions across any number of entities.

This blog focuses on the best practices companies can utilize to solve the challenges of intercompany transactions for financial consolidation. You can use these practices to enable the smoother flow of transactions, save time spent on month-end reporting and reduce the number of errors in your reports. By implementing the four simple practices covered, you can quickly deal with reconciliations and eliminations and take pressure off teams trying to coordinate consolidated financial statements.

1. Create global policies that include the nitty-gritty of intercompany transactions

For companies that operate globally, intercompany transactions can present a whole range of challenges from different currencies and exchange rates to varying compliance standards. To meet the financial requirements of global governing bodies, your organization needs to establish policies that account for these variations across all entities.

Most companies can present several pages of high-level policies that cover intercompany accounting. These policies often fail to provide the detail needed to ensure smooth transactions. This level of detail is essential for proving compliance with global accounting standards like IFRS 10 and ASC 810.

Ensure your policies are comprehensive enough by establishing a common chart of accounts and standardizing reporting capabilities across all entities (so that reports require little manual intervention). One of the easiest ways to do this is to implement software that quickly identifies and isolates intercompany transactions.

2. Set up a master data management solution to implement standardized global policies across all  intercompany transactions

Set up a master data management solution to standardize intercompany

Having standardized global policies that include intercompany transactions in their scope is only the first step. As anyone can tell you, the best-laid plans are rarely enough to achieve the desired results. Implement policies in a controlled, centralized environment that reduces the likelihood of human error.

These policies are often rigorous and challenging to implement across various entities. It’s best to consider the value added by a centralized ERP system, allowing you to create standardized charts of accounts that ensure consistency across all transactions and accounting.

Invariably, using appropriate software saves teams from spending many hours figuring out intercompany transactions and making adjustments in consolidated reports. It also helps with creating standard processes and calculations, which makes accounting for month-ends more efficient.

3. Automate transaction matching to speed up reconciliations and eliminations

Ask any team that deals with multiple entities where they sink the most time, and you’ll find that eliminations and reconciliations for intercompany transactions will be pretty high on the list. Reconciling transactions across various systems can be an administrative nightmare that can take days (if not weeks) to solve each month.

There are plenty of software solutions that automate this process by matching transactions between entities. It’s also vital that it identifies issues as they arise, allowing your team to allocate resources to investigate problematic transactions rather than every single one.

Automate transaction matching to speed up reconciliations and eliminations

4. Implement continuous close accounting practices

Accounting for intercompany transactions is one of the most time-consuming and cumbersome tasks that accounting teams face at the end of a period. Most companies require this task either monthly or quarterly, leading to hectic period ends, with all-hands-on-deck scrambling to consolidated financials from each entity into one comprehensive financial statement.

The problem is that teams are querying intercompany transactions that may have occurred four weeks ago. In most companies, a lot happens in a month, and the older a transaction is, the more time-consuming it can be to query.

The best practice is to introduce continuous close accounting practices that turn your usual period-end closing tasks into daily activities throughout the month or quarter. This allows your team to match, reconcile and eliminate transactions on an ongoing basis, spreading the workload across the period and removing the need to scramble to account for all intercompany transactions at month-end.

Consolidation best practices - starboard group case study

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