What Does Intercompany Transactions Mean

Within a group or group, the different companies and subsidiaries involved tend to exchange goods and services with each other. These flows are commonly referred to as intra-group transactions. In the context of intra-group accounting, consolidation is defined as the mechanism by which a group cancels transactions between its different entities. The objective is to combine the financial statements of the parent company and its subsidiaries to allow for the presentation of an accurate balance sheet and profit and loss account that reflect the financial situation of the Group as a whole. In order to remedy intra-group accounting discrepancies, the coordination process must be optimised, currency hedging solutions must be considered and a more uniform management approach must be pursued at Group level. Accomplishing this enormous task requires a thorough understanding of the processes involved in the reconciliation, elimination and settlement of intercompany transactions, as they are typically carried out in many multinational organizations. Intercompany transactions can be reported in an organization`s accounting system at the time of their creation so that they can be automatically reset during the preparation of consolidated financial statements. If there is no tagging function in the software, transactions must be identified manually, which is subject to a high degree of error. The latter case most often occurs in a small organization that has used a less feature-rich accounting system and now finds that it does not have the transactional tagging capabilities to account for its subsidiaries. Due to globalization, industry consolidation and the increasing complexity of multinational value chains, more and more companies are facing costly business accounting problems. From a compliance perspective, the intercompany transaction process is becoming increasingly complex and risky for globally expanding companies. See ”The Growing Challenges of Intercompany Transactions” for a checklist of challenges that need to be addressed.

Intercompany accounting is a set of procedures used by a parent company to eliminate transactions between its subsidiaries. For example, if a subsidiary sold goods to another subsidiary, it is not a valid sales transaction from the parent company`s perspective because the transaction took place internally. Therefore, the sale must be removed from the books at the time of preparation of the parent company`s consolidated financial statements so that it does not appear in the financial statements. With a master data management program, new and acquired accounts are configured to follow guidelines, and all intercompany transactions are processed using the same standardized method. This includes the use of technology solutions to integrate the flow of transactions between platforms and control activities across multiple ERP systems. The lack of proper and sufficient internal accounting practices is part of the problem. According to a deloitte study, the biggest challenges are: such a state-of-the-art solution should be centrally connected to all erp and core systems inherited from a company in real time. It should also include a single process for collecting and distributing intercompany transaction data, eliminating issues related to currency values, transaction amounts, and tax implications. BlackLine`s business-to-business hub centralizes end-to-end business-to-business accounting management to reduce complexity and risk, streamline processes, and gain global visibility. It is designed to eliminate the so-called biggest bottleneck for fast and accurate global financial closes through an integrated intercompany accounting process. The most common discrepancies in intra-group accounting are often due to the following factors: Balancing intercompany flows can be tiring and time-consuming. To get it right, accounting professionals from the group`s various subsidiaries need to work closely with their peers, in accordance with a number of predetermined group-wide processes.

During the reconciliation phase, it is important to clarify: Intercompany transactions can be reported at the starting point in an organization`s accounting system so that they can be removed from balance sheets and other financial reports if necessary. However, if the accounting software does not have a labeling function, transactions must be identified manually – a process that takes time and presents a high risk of error. An intercompany transaction is a transaction between affiliates (i.e. between a parent company and one of its subsidiaries or between subsidiaries of a parent company). Transactions between members of a corporate group must be considered and eliminated for the consolidation of affiliates. In growing companies, especially multinationals, there can be hundreds of thousands of internal transactions involving different currencies and tax treatments, much of which is often only recorded in spreadsheets. If accountants mismanage these internal transactions, any unbalanced account that affects closing can lead to compliance issues. Under this policy, companies may consider implementing a multilateral clearing program, as this ensures that each company`s intra-group liabilities and receivables are imported from their respective ERP solutions. From there, all liabilities are deducted from their receivables to determine a single net repayment amount. A business-to-company transaction occurs when a department, service, or unit within an organization participates in a transaction with another department, department, or unit in the same organization.

These transactions may involve a parent company and a subsidiary, two or more subsidiaries, or even two or more departments within a unit. And they can happen for a variety of reasons. For example, a company may sell inventory from one department to another, or a parent company may lend money to one of its subsidiaries. In some situations, the determination of an arm`s length price has been changed, and companies are now required to disclose even more about their intercompany transactions and financial results. The IRS recently released the final regulations that adopt the BEPS recommendation of country-by-country reporting requirements for multinational enterprises that generate more than $850 million in revenue each year. These rules require disclosure of income, persons, income, capital and related and unprocessed taxes paid for businesses in any tax jurisdiction of residence. By abolishing intercompany shareholding, on the other hand, the assets and equity accounts owned by the parent company of the subsidiaries are eliminated. For example, if a parent company has included unrealized intercompany gains in its retained earnings at the end of a given period, the non-controlling interest is incorrectly indicated. Accounting staff must prepare an intercompany disposal to eliminate the intercompany profit that was included in the retained earnings. Every transaction has nuances to consider.

For example, if the transaction takes place between the parent company and a subsidiary, accountants must treat it as an arm`s length business in which both parties act independently of each other, as if they had no relationship with each other. .