Improving intercompany accounting transactions

August 22, 2023

A blog post by Beth Kaplan, Katie Glynn, & Anna Andersen

Organizing and cleaning up intercompany (IC) ledgers and transactions can feel overwhelming, especially if IC out-of-balance (IC OOB) accounts have been on the books for a while. Today, we will discuss some common pain points, IC accounting leading practices that professionals can utilize to resolve IC OOB, and small steps you can take to clean up your OOB accounting (leveraging technology if available).

Some common IC accounting pain points

• Multiple, vaguely defined IC policies with various localized exceptions and transaction creation leading to incompatible or inadequate matching values and amounts at settlement
  
• Varying IC transaction cutoff dates and lack of pre-close routine confounding settlement matching
• Settlement of IC transactions during the general ledger close period
• Manual netting/settlement process

Strategies and leading practices to help alleviate pain points

Define who, when, and how IC transactions can be netted/settled with a single source of truth to put the team on a level playing field.

• Establish a single, detailed, global IC policy and automated, dynamic settlement (occurring on one day) and clearing of detailed originating transactions multiple times during a general ledger period.
• Real-time processing of IC transactions, usually in advance of accounting month end, allows teams to see where they have variances with trading partners—allowing time for those transactions to be corrected before transferring the balance to the general ledger.

Utilize features in existing technology to increase data quality and automate settlement of IC transactions.

• Incomplete IC settlement is a common paint point. Users may be unaware that they need to settle their transactions, or the software doesn’t require an IC trading partner, account, or products as part of their transaction. Take advantage of your existing technology’s features and begin using a specific transaction type, IC accounts, or IC products to increase your data quality.
• With better-quality data, you can increase the probability that transactions can be automatically settled in an existing system or easily extracted for import into a matching tool.
• Does your enterprise resource planning (ERP) or consolidation software allow the setup of IC OOB accounts? These accounts group IC accounts to “offset” each other, and any amount greater than your organization’s tolerable thresholds indicates there is cleanup left to work on.
• Additionally, many ERPs have IC subledger capabilities that organizations can use in the same way as your trade accounts payable/accounts receivable (AP/AR) activity but with internal customers, vendors, and products. Utilizing this system functionality, you can take advantage of the correct pricing model for IC sales, which can help to alleviate pain points around transfer pricing, profit-in-inventory, markup, and toll charges, to name a few. Another way to utilize system functionality is to ensure separate IC customers, vendors, and products are set up in order to generate proper IC invoicing, tax calculation, IC aging, and IC margin calculations.

Net/settle IC transactions frequently during the general ledger period.

• Having a clearly defined process and timing allows teams to correct IC activity before month end. Just like trade AP/AR, consider setting up weekly IC AP/AR processing so you can reduce the number of transactions you are processing at one time, and allow accounting teams to discuss differences in IC AP/AR amounts before the pressure of month end sets in.
• If you can utilize system functionality to automate netting/settlement and require IC fields (account, product, trading partner, etc.), users will have an opportunity to correct or complete IC transactions before month end.

While it may seem overwhelming, resolving your IC OOB just takes a little time and organization. Establishing a clear process and timing, utilizing features of existing software, and increasing the iterations of IC invoicing and matching are strategies that can be utilized to help alleviate common IC matching pitfalls and get you on the road to a smooth month end.

Overwhelmed and not sure where to start? We can help. Feel free to reach out to a member of our IC accounting team and learn how Deloitte’s people, process, and technology can assist you on your path to intercompany optimization.