In recent years, many profitable, well-respected companies have had to restate their financials because of errors in intercompany transactions. Intercompany transactions contribute substantially to the global economy, and accurately accounting for it is vital to the financial well-being of your business. What is intercompany accounting?
What Is Intercompany Accounting?
Intercompany accounting is about documenting financial transactions between different legal entities that form part of the same parent company. Since there is a relation between the different entities, transactions are not viewed as independent. As a result, companies can’t include profit or loss from intercompany transactions on their consolidated financial statements.
A parent company sees intercompany accounting as a way to eliminate transactions that happen between subsidiaries from certain accounting documents. When transactions happen internally, they have to be removed from the books when preparing consolidated financial statements for the parent company.
Examples of intercompany accounting include:
- Centralized cash management functions
- Fee sharing
- The purchase or sale of goods between subsidiaries and their parent company
- Leases between the parent company and subsidiaries
Challenges With Intercompany Accounting
Business is global. This means there’s a rise in international trade and growth in the forms of mergers and acquisitions. Along with this geographical diversity and growth, come complicated and often conflicting regulations. This can become challenging for a parent company with businesses that trade in separate countries.
Transactions are further complicated by local currencies, policies, transfer pricing, and disparate applications and systems. If your organization does not document these transactions correctly, they can lead to out-of-balance accounts that negatively impact financial statements. The resulting compliance issues, Securities and Exchange Commission (SEC) fines, and shareholder lawsuits can be devastating for your company.
Intercompany transactions take on an additional level of complexity in taxes. Your business needs to review its value chain to understand and create valid taxing policies and transfer pricing agreements. As the volume of these transactions grows, emails, verbal approvals, and spreadsheets are a recipe for reputational, compliance, and financial risks.
How to Approach Intercompany Accounting
The first step is establishing a straightforward process that allows you to authorize and clear intercompany transactions. Software like NetSuite can help automate the process, but you first need to manually create consistent standards that will guide the software to the rules that will form its base.
Once policies that include the products or services offered between subsidiaries are established, automation can be used. Trying to keep track of hundreds or thousands of transactions on spreadsheets is inefficient. It becomes more inefficient when dealing with local tax codes, exchange rates, and different currencies.
NetSuite allows you to tag intercompany purchase orders or sales at the moment of creation. It automatically removes the expense and revenue linked to intercompany transactions. It also has an intercompany netting functionality that saves your organization resources during the settlement process and minimizes the number of invoices your organization needs to create and process each month.
Centralization means managing all businesses, including subsidiaries, in one place. You need a single accounting platform, like NetSuite, that provides visibility into all intercompany transactions.
Software That Supports Intercompany Accounting Best Practices
NetSuite is reliable software to use for intercompany accounting as it automates intercompany accounting best practices. The software makes the elimination of intercompany transactions and the reconciliation of said transactions more efficient and with fewer errors. When you create a purchase requisition or sales order, NetSuite allows you to tag it as an intercompany transaction.
These transactions can be linked, making tracking them easy. NetSuite automatically identifies what transaction lines should be eliminated when an order is invoiced. This information is automatically posted in the proper elimination journal entry.
NetSuite reduces the manual effort needed to settle intercompany accounts. Accounting managers can seamlessly combine mutual subsidy balances and use those to create settlements for selected transactions automatically.
Solving multi-subsidiary intercompany allocation issues can eat up a lot of your time. NetSuite provides customizable solutions that automate the process. This lets your organization free up its accounting staff to focus on other parts of the business.
Are you overwhelmed by all of the touchpoints that come with successfully accounting for intercompany transactions? Our CPAs can help.
Fusion CPA is a professional outsourcing accounting controller service. We help businesses with everything from general accounting and tax planning to implementing intercompany accounting best practices. We can help you evaluate your current process for monitoring intercompany transactions and then offer suggestions to help make the process more streamlined and customized for your organization. We can also help you with software solutions to best manage your intercompany transactions.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.