Intercompany accounting has received increased attention from auditors, regulators and accounting standards boards in recent years, in part because of errors in intercompany transactions that forced several high-profile companies to restate their financials. Intercompany transactions account for 30% to 40% of the global economy, equaling almost $40 trillion annually, and are the fifth most common cause of corporate financial restatements, according to accounting firm Grant Thornton LLP.
Despite this, intercompany accounting rarely gets the attention it deserves within most organizations. Disparate systems, lack of visibility across business units, inconsistent intercompany policies and procedures, and dependence on spreadsheets make performing intercompany reconciliation and elimination a time-consuming and labor-intensive process. With limited accounting staff and poor coordination between business entities, balancing intercompany accounts often gets pushed to the bottom of the task list, where it’s only addressed when absolutely necessary.
A Three-Step Approach to Intercompany Accounting
Getting a handle on intercompany transactions is essential for accurate reporting, compliance with local tax codes, regulations and accounting rules, and for good governance in general. For those struggling with intercompany accounting, the following steps can help improve performance.
Establish standards, policies and procedures. The critical first step in improving intercompany accounting is establishing a consistent process for identifying, authorizing and clearing intercompany transactions. While it’s tempting to put automation first – after all, manual processes are part of the problem – without consistent standards, attempts to automate intercompany accounting often fail.
Policies should include a list of which products and/or services will be provided between subsidiaries, transfer pricing for each and the level of authorization needed for any transaction. Other requirements include rules for identifying and completing transactions, a list of designated intercompany accounts and a schedule with specific deadlines for clearing intercompany balances each month.
Automate processes. Once processes and policies have been implemented and are being followed, the next step is automation. Trying to keep up with hundreds or thousands of transactions using spreadsheets is inefficient and increases the risk of errors. And for companies with subsidiaries in multiple countries, it’s even more difficult. Dealing with currency exchange rates, local tax codes and different accounting rules can make closing the books on time seem impossible.
Keep in mind that not all accounting solutions are capable of managing intercompany transactions. Software designed for emerging companies, for instance, typically doesn’t support multiple business entities. This is a critical limitation, as it makes identifying and matching transactions between subsidiaries a largely manual process.
At minimum, the software should provide a way to tag intercompany purchase orders and sales orders as they are created, and automatically link them so accounting doesn’t have to search through thousands of entries to find the matching pairs. Revenue and expense associated with intercompany transactions should also be removed from consolidated financials automatically during the close process. Ideally, the system should also include intercompany netting functionality. Automated netting not only saves time during the settlement process, but also saves money by reducing the number of invoices that must be generated and payments that must be processed each month.
Centralize. The job of managing intercompany accounting ultimately falls on the corporate accounting staff. This typically means everything gets done as part of the closing process. While that’s understandable given accounting's other responsibilities, waiting until the end of the month isn't ideal. For one, it extends the close cycle. Intercompany elimination by itself can add days to the process if not automated, which can impact the timing of reports. Pressure to close the books quickly can also increase the risk of errors.
The best approach is to centralize intercompany accounting under a specific individual or, depending on volume, individuals with oversight by the corporate controller. While dedicating resources to manage an activity that isn’t seen as strategic may seem hard to justify, the efficiencies gained and improved oversight of the process will pay dividends. Managing the process centrally requires visibility into all intercompany transactions. This is difficult for organizations that rely on multiple, disparate accounting systems. So to truly control the process, it's critical to manage the business, including all subsidiaries, on a single accounting platform.
NetSuite Intercompany Accounting
NetSuite automates intercompany accounting, making reconciliation and elimination of intercompany transactions more efficient and reducing the risk of errors. Sales orders and purchase requisitions can be tagged as intercompany transactions when created, linking them together for easy tracking. When the order is invoiced, the system identifies transaction lines that need to be eliminated and automatically posts the appropriate elimination journal entries.
NetSuite also improves financial controls and reduces the manual effort required to settle intercompany accounts. Accounts payable/accounts receivable netting allows accounting managers to combine mutual subsidiary balances and then automatically create settlements for select transactions.
Watch this webinar to learn more about NetSuite intercompany accounting.