Intercompany transactions often result in cumbersome workloads for accounting teams. This statement is as true for smaller organizations as for global corporations. The best practices presented below are essential for companies of all sizes and help teams reduce the complications of intercompany transactions across any number of entities.
Finance teams must be mindful of intercompany accounting policies and implement the robust processes needed to manage these transactions as complexity increases and organizations grow. Those that fail to prioritize intercompany accounting run the risk of non-compliance and hours of time lost to time-consuming manual processes. Companies can utilize the practices below to solve the everyday challenges of intercompany accounting for financial consolidation.
Not sure if this article is for you. Here’s what you’ll learn to do:
- Enable a smoother flow of intercompany transactions
- Save time spent on month-end reporting
- Reduce the number of errors in your reports
- Develop global accounting policies for reconciliations and eliminations
- Adopt a holistic framework for intercompany accounting
- Invest in the right technology to streamline your processes
- Take the pressure off teams trying to coordinate consolidated financial statements
Further reading: Your FAQs about intercompany accounting for multi-entities answered
A breakdown of the best practices for handling intercompany transactions
1. Follow an intercompany accounting framework for the best results
Why a framework is vital for multi-entity accounting
Getting multiple companies to coordinate their reporting and intercompany transactions can be quite the headache. One of the best ways to get all entities on the same page is to choose an established framework. Frameworks should allow you to break down the end-to-end process while providing a vision for teams to understand new policies and where their efforts fit into the bigger picture. It also assists teams in drafting global accounting
A suggested framework from Deloitte Risk Advisory
This framework is an excellent place to start your intercompany accounting journey as it breaks down the approach into seven critical components. Below the image, we’ve quickly defined each area for consideration.
Governance and policies
Intercompany accounting practices start with effective global policies governing data management, accounts charts, transfer pricing, and revenue allocation.
Finance works to develop appropriate arm’s length pricing and introduce global pricing policies across all subsidiaries that provide transaction-level pricing and reporting guidance.
Categorize intercompany transactions by type. Then develop specific workflows and procedures to streamline and simplify processing for each category and normalize reporting. These steps enable consistency, as well as effective dispute resolution between entities.
Developing a centre of excellence for data management and governance requirements is a critical component of intercompany accounting. Common charts of accounts and clearly defined reporting requirements are crucial to meeting global data management accounting regulations.
Reconciliations and eliminations
Companies who want to streamline this time-consuming element of intercompany accounting must consider the introduction of automated workflows and a centralized accounting environment that can handle multiple entities. Without this step, companies will find managing this will burn through resources, squandering valuable talent as teams struggle to balance statements and produce accurate financial information.
Netting and settlement
Companies need a defined cash management strategy and a multilateral settlement. It’s wise to determine policies for settlements requiring a cash transaction rather than an account entry. It’s also important to outline when to clear originating transactions son local ledgers.
Internal and external reporting
The consolidated financial statement presents the biggest challenge of intercompany accounting for parent companies and even for child companies trying to satisfy the requirements of their parent organization. Collecting consistent records across all entities can be daunting, and those that excel in this area generally have all the other components in place. Leaders tend to have a centralized intercompany accounting environment with minimal manual input from various entities.
2. Create global policies that include the nitty-gritty of intercompany transactions
How global accounting standards complicate matters
Deloitte refers to intercompany accounting as “the mess under the bed, ” a mess which involves serious risk for those who fail to clean up their processes. Regardless of the size of your enterprise, intercompany transactions increase with complexity as you grow. Whether dealing with two entities in the same city or twenty spread worldwide, you must be mindful of the guidelines governing your transactions between entities.
The challenges of intercompany transactions include everything from managing 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.
The state of global intercompany transaction policies for most organizations
The problem is that most companies believe they’ve already taken this step. Most can present several pages of high-level policies that cover intercompany accounting. However, these policies often fail to provide the level of detail needed to ensure smooth intercompany transactions. This level of detail is essential for proving compliance with global accounting standards like IFRS 10 and ASC 810.
How to ensure your intercompany accounting policies remain relevant
- During expansion activities, review all policies to ensure consistency across all subsidiaries.
- Identify differences in reporting between subsidiaries and decide on a streamlined version, train teams if necessary or use software that can handle this.
- Appoint someone to be a subject matter expert on IFRS 10, ASC 810, and other relevant accounting policies.
- Ensure your policies include a common chart of accounts and standardize reporting across all entities.
- Follow an intercompany accounting framework for best results when setting policies.
- Where appropriate, translate policies clearly and provide adequate training, resources and software for all entities.
- Establish a centre of excellence to define, govern and communicate these policies clearly.
3. Invest in a centralized master data management system to standardize all intercompany transactions procedures
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.
Features to look for in intercompany transaction software solutions
- Automates intercompany transactions across all entities
- Provides a centralized environment with controlled access
- Allows for fast and effective audits of all intercompany accounting
- Exists in the cloud so reports are immediate and accurate
- Introduces a chart of accounts across all entities
- Handles settlements, eliminations, and reconciliations effectively
- Scales as you grow to ensure continued compliance
- Utilizes robust security to protect sensitive financial information
For more on the features to look for in financial consolidation software, check out this blog.
4. 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.
Plenty of software solutions automate this process by matching transactions between entities. These systems should be capable of identifying different types, automatically identifying and accounting for each in month-end reporting. This frees up time to deal with issues as they arise, allowing your team to allocate resources to only investigate the most complicated intercompany transactions rather than every single one.
5. 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 consolidate 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.