Intercompany reconciliations can be a major source of stress for accounting teams working with numerous entities. It doesn’t matter if you’re the parent company or the subsidiary. Reconciling a high volume of transactions every month can lead to administrative headaches and bottlenecks that leave your accounting team frustrated and struggling to update systems so that records are accurate across all entities.
Explore everything you need to know about intercompany reconciliations, from defining what they are to walking you through the benefits and challenges; there are helpful tips here for any company struggling to streamline this process.
Your FAQs about intercompany reconciliations answered
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- What is intercompany reconciliation?
- What are some types of intercompany reconciliation?
- What are intercompany payables and receivables?
- What is an example of intercompany reconciliation?
- How do intercompany reconciliations work?
- What are the benefits of intercompany reconciliations?
- What are the challenges of intercompany reconciliations?
- How can you improve intercompany reconciliations?
Intercompany reconciliation is the process of verifying transactions between separate entities of the same parent company. These transactions are referred to as intercompany transactions. Reconciliation is a process relevant to many companies. An entity refers to any divisions, subsidiaries, units, or franchises that come under the ownership of a parent company.
Intercompany reconciliation must take place to ensure that consolidated financial statements and data are accurate. It involves confirming that the transaction amount is recorded correctly by both the parent company and the entity and then eliminating it from closing statements.
The three different types of intercompany reconciliation are directly aligned with the three types of intercompany transactions. Below is an example of each one.
- Reconciliation of downstream transactions | When a parent company sells to its subsidiary.
- Reconciliation of upstream transactions | When a subsidiary sells to its parent company.
- Reconciliation of lateral transactions | When two subsidiaries of the same parent company sell to each other.
Reconciliations do not just apply to the straightforward exchange of products, and it’s essential to understand that they must be performed on all intercompany payables and receivables. These can include the exchange of labour, products, or raw materials.
- Intercompany payable is any sum owed from one entity to another (parent or subsidiary).
- Intercompany receivable is any sum owed to one entity from another (parent or subsidiary).
There are numerous examples of intercompany reconciliations, and depending on the type of transaction, the action required will vary. Let’s look at one of the most common types:
- A parent company sells product to its subsidiary (i.e., a downstream transaction).
- The subsidiary sells some of this product to its customers and keeps some in stock.
- Reconciliation will require the parent company to account for the balance due from the subsidiary, the sale transaction for the cost of products sold, and any revenue earned.
- Reconciliation will require the subsidiary to account for any balance due, intercompany profit, and purchase transaction.
If both the parent company and the subsidiary record these steps appropriately, the transactions will cancel each other out, and they will successfully complete the reconciliation.
- When clear intercompany transaction processes are in place
Intercompany reconciliations work when there are clear processes around managing transactions and companies have the necessary access to timely and accurate data from other entities.
- When automated processes replace manual labour
One of the challenges when handling intercompany transactions is when teams assume they can manage the workload in spreadsheets or separate accounting solutions by manually inputting data. This can lead to cumbersome manual work (e.g., downloading and uploading different files and reports, trying to move information from one accounting system into another, cross-referencing and double-checking for the most recent version of files, struggling to keep up with emails from various entities) and can put both teams under administrative strain.
- When a centralized solution is in place between entities
Reconciliations are best performed in an accounting solution where all entities have access to the data they need in a streamlined, centralized environment. It’s possible to invest in solutions that have advanced security, allowing subsidiaries access to only the information they need while granting parent companies enough access to complete reconciliations and eliminations accurately.
- When reconciliations are performed regularly
It’s best to perform reconciliations on an ongoing basis, as it can be hard to keep track when teams only check intercompany transactions every month or so. It’s easy for people to forget the details of particular transactions, and it can become increasingly more difficult o resolve errors. If teams have the capacity, this task should be performed on a weekly, if not daily, basis. Many companies invest in an automated solution as the volume of these transactions grows as it can become impossible to keep up.
- When global accounting policies are standardized across entities
Even when companies don’t have the means to invest in a centralized solution, they should take the time to roll out global accounting policies to help all entities report in a way that will enable compliance with accounting standards. These policies should include everything from naming conventions to workflow standardization. Setting expectations makes it easier to align data and reconcile transactions between entities.
Without automation, reconciliations can be time-consuming, with few benefits outside of remaining compliant with global accounting practices. However, when reconciliations are automated effectively, the process has many benefits. Here’s a handful:
- Reduce time spent on manual tasks, cutting administrative costs dramatically
- Optimize liquidity by giving real-time, accurate access to critical data
- Minimize transaction fees by streamlining processes
- Increase the likelihood of financial compliance with global accounting standards
- Reduce time spent on month-close and consolidated financial statements
- Eliminate most errors and allows key team members to work on more strategic initiatives
- Allows for more predictable forecasting and better allocation of resources such as stock and labour
- Gives leadership teams access to more accurate performance metrics, allowing for better decision making
When intercompany reconciliations are not streamlined or automated, they can present a number of challenges. Here are a few:
- Stressful working environment due to administrative burden
- Overwhelmed teams facing a frustrating number of bottlenecks
- Incomplete or inaccurate reports and errors
- Delays in processing intercompany transactions
- High risk of issues in consolidating financial statements due to errors
- Inability to provide an accurate, timely audit trail
- Failure to meet global accounting standards and risk of non-compliance
- Failure to make strategic decisions due to inconsistency or lack of data
There are a number of steps you can take to streamline and automate intercompany reconciliations and ensure your finance team doesn’t struggle to keep up.
Automate, automate, automate | Wherever possible, teams need to eliminate bottlenecks by identifying time-consuming processes and looking to automate and streamline these areas. Investing in a solution built to handle the complexity of intercompany reconciliations will be key to boosting efficiency and improving intercompany reconciliations.
Centralize financial data across entities | A centralized solution can collectively save your entities months of work per year. By giving entities easy access to the information they need, you eliminate the back-and-forth of countless emails. Don’t let reports or records end up stranded on one person’s computer, ensure there’s an environment where anyone can gain secure access to the critical information they need to do their job.
Embrace continuous close | Rather than postponing reconciliations to the end of the month (which can lead to overwhelm), teams should constantly track and reconcile intercompany transactions. Automating this process is possible, so your system continually flags errors, mistakes, or potential fraud.