Intercompany Reconciliation: Experts Tips for CFOs

When there’s a parent company and subsidiaries, intercompany reconciliation becomes a common and required practice. Many businesses leverage the help of financial automation solutions to help manage general ledger reconciliation and intercompany reconciliation to reduce errors, streamline the process, and ensure compliance.

Here, we will share some expert tips for dealing with intercompany reconciliation without hassle.

Coming Up

1. What is Intercompany Reconciliation?

2. What is an Example of Intercompany Reconciliation?

3. How do Intercompany Reconciliations Work?

4. What are the Benefits of Intercompany Reconciliations?

5. What are Intercompany Payables and Receivables?

6. What are the Challenges of Intercompany Reconciliations?

7. How to Improve Intercompany Reconciliations?

8. Wrap Up

What is Intercompany Reconciliation?

Intercompany reconciliation is the process of reconciling transactions between legal entities under a single parent company or figures between two consecutive branches.

For example, if two companies under the same parent buy and sell to and from one another, then there’s one legal entity paying the other under the same name.

To ensure that financial statements and data is accurate, intercompany reconciliation takes place to confirm the transaction amount is recorded right for both parties and, in closing, to eliminate them from statements.

Essentially, the goal is to remove this type of revenue and costs from statements because it all falls under the same company.

What is an Example of Intercompany Reconciliation?

There are many intercompany transaction examples. Let’s take a look at a very generic overview of how it works to understand what accounts are affected as a result of intercompany transactions.

A parent company bought items and sold them to their subsidiary to sell to customers. The subsidiary sold some items to customers, and kept the remaining unsold items in its inventory.

When it comes time for intercompany reconciliation, the parent company will have to take into consideration the balance due from the subsidiary, the sale transaction for the cost of goods sold, and the revenue earned. The subsidiary will take into account the balance due to the subsidiary, the inventory balance, intercompany profit, and the purchase transaction.

In the end, these records should all cancel each other out.

How do Intercompany Reconciliations Work?

As you can see from the abbreviated example above, intercompany reconciliations only work with accurate and timely data, as well as the proper access to the data needed.

Sure, companies do try to perform this process manually or by using Excel spreadsheets. But, it can quickly become overwhelming, error-prone, and complex, especially as the amount of transactions grows or more subsidiaries are added under the parent company.

It’s best to perform this process on a daily, or at least monthly basis. While that can be a lot to ask of your team if they are expected to do everything by hand, you can instead leverage a finance automation solution that can manage the process for you. This way, your team will be able to focus their time and energy on more strategic, analytical, and high-level tasks.

The reconciliation process results in the elimination of and balancing out of intercompany transactions. Balances will need to be reviewed and reports are a product of the process. Intercompany reconciliation includes:

• Treasury operations
• Cash planning
• Regulatory reporting
• Currency management

The process, when initiated and executed optimally, entails:

• Developing global policies that can be standardized
• Integrating data from multiple sources
• A clearly defined workflow

What are the Benefits of Intercompany Reconciliations?

There are several benefits of efficient intercompany reconciliation. When performed properly and in a timely manner, it can result in:

• Optimized liquidity
• Minimized bank transactions fees
• Reduced currency costs
• Identifying unrecorded transactions
• Spotting incorrectly recorded transactions or balances

Intercompany reconciliations are necessary so that the consolidated financial position and financial status of the group, including parent and subsidiary, is properly known.

Financial positions impact business decisions, so you want to make sure that you always know where the entire group actually stands, rather than looking to artificially increase assets, liabilities, incomes, and expenses at the hands of intercompany transactions.

What are Intercompany Payables and Receivables?

Any sum that is paid from one entity to another within the parent company’s umbrella is considered an intercompany payable. Similarly, intercompany receivables define any money that is owed to one entity from another under the same parent company.

There are a few types of intercompany payables, namely:

• Exchange of finished products: This could happen if there are two or more subsidiaries that sell the same items. If one entity runs out of inventory, you may need to move it over from another entity.

• Exchange of raw materials: This is similar to the exchange of finished products, but instead it reflects the exchange of an ingredient or resource used to create the finished product. One of the easiest examples is a bakery that runs out of flour or butter and shares with a sister company.

• Exchange of labor: Lastly, you may need to share employees across companies if the demand for labor fluctuates between them. When it comes to accounting, the intercompany exchanges of time and salary/hourly cost needs to be taken into consideration.

What are the Challenges of Intercompany Reconciliations?

Intercompany reconciliation can be streamlined with the aid of automation solutions. But, when it isn’t, there are some common pain points that occur for companies.

These challenges include:

• Lack of technology: The lack of software solutions to service intercompany reconciliation can cause bottlenecks, frustration, and manual errors.

• Timing: Incorrect records of Accounts Payable (AP) due to delays or mismatched data

• Assignment of responsibilities: The lack of identifying key people to be in charge of this process

• Audit: The potential risk of an undesirable audit opinion should there be errors

• Pressure: The pressure to close to the books properly at the end of the financial close period

• Data Access: If documentation exists across businesses with no central repository for information, those who need access to data may spend time having to search for it

How to Improve Intercompany Reconciliations?

All of the inefficiencies associated with the various types of intercompany transactions can be overcome when addressed.

Let’s takes look at how:

1. Automate

First things first, intercompany reconciliation pain points can be improved with automation solutions. Accounting software leverages the use of data automation or robotic process automation (RPA) to boost efficiency.

The technology is able to perform transaction matching according to set rules and tolerance levels. Should an anomaly occur or an item that surpasses the accepted threshold, then you will receive a notification. Accounting teams no longer have to manually sift through, search for, and deal with data from disparate sources.

Automation solutions also pull data from different systems so that everything can be addressed in a central location. With the use of secure software, you can store data, manage data, and use data.

2. Improve Process Visibility

When invoices and records are stuck across offices or computers, it’s hard to know what step the process is at. Additionally, everyone involved in intercompany reconciliation should be aware of the standards and be able to access documentation, intercompany agreements, and transfer pricing regulations.

3. Switch to Continuous Close

The monthly process may already feel overwhelming and like it’s too much to handle. BUt, tracking transactions continuously will actually end up alleviating the burden of having to deal with so much at once.

Rather than having to deal with thousands of reconciliations, you can utilize people, processes, and automation solutions to execute more continuously. This also helps to detect inconsistencies, mistakes, or fraud before it spins out of control.

4. Centralise Documentation

With a single solution to help manage intercompany reconciliation, you can make sure that all documentation is centralized and accessible to those who need it. Along with approvals, disputes, workflows, and controls, everything will exist in one place. This helps to minimize confusion and stress.

Wrap Up

Ernst & Young has reported that up to 59% of resources in a financial department are spent managing transaction-intense processes.

That means that the majority of a financial team’s time, energy, and money is being spent on something that can be managed by automation tools. And, even worse, most of the time, it’s all in vain because the time being spent may be on properly recorded transactions, rather than error-prone entries that actually need attention.

Don’t be a company that falls into this statistic. Instead, invest in a financial automation solution that will help to achieve operational efficiency, manage intercompany reconciliation and all other reconciliation processes seamlessly, and allow your valuable human resources to dedicate their time to responsibilities that require human thought.