Intercompany accounting and M&A challenges

Navigating potential ways to address intercompany reconciliation

Intercompany accounting (ICA) is sometimes referred to as the mess under the bed. Nowadays, many companies are experiencing challenges in ICA as they grow their businesses, especially when the achieved growth is inorganic growth, such as mergers and acquisitions (M&A). When coupled with the complexity of M&A integrations, ICA is more than the mess under the bed—it may become the proverbial monster hiding under there.

January 19, 2021

A blog post by Beth Kaplan, managing director, Deloitte & Touche LLP; Katie Glynn, senior manager, Deloitte & Touche LLP; and Lina Wang, manager, Deloitte & Touche LLP

Intercompany accounting (ICA) is sometimes referred to as the mess under the bed. Nowadays, many companies are experiencing challenges in ICA as they grow their businesses, especially when the achieved growth is inorganic growth, such as mergers and acquisitions (M&A). When coupled with the complexity of M&A integrations, ICA is more than the mess under the bed; it may become the proverbial monster hiding under there. As the global M&A market has been high-flying over the past six years, in which worldwide activity has rocketed past the $3 trillion mark, more and more companies face ICA challenges during the M&A integration journey.

Understanding the root causes of ICA challenges under the common M&A integration context is essential to navigating potential ways to address these challenges and help organizations achieve success in managing ICA activities during their M&A integration journey. 

Intercompany accounting challenges facing M&A integrations

Disparate systems and chart of accounts

With M&A transactions, companies often inherit heterogeneous financial systems and charts of accounts, which expose them to greater challenges in meeting reporting and compliance requirements. Before the full integration of financial systems and charts of accounts, acquiree companies usually export their trial balances from their local accounting systems and use separate templates to post journal entries in the acquirer companies’ financial systems. Thus, data reported to the acquirer’s financial systems may not provide the granular level of detail for accounting and treasury to match intercompany transactions and perform reconciliations, netting, or settlement. Furthermore, the lack of detailed data also creates significant challenges in financial, tax, statutory, and regulatory reporting capabilities.

Foreign exchange (FX) exposures

For cross-border acquisitions, FX exposures may become a considerable challenge to manage. Sometimes acquiree and acquirer use different FX rate sources (e.g., Bloomberg rates versus Central European rates). Small differences in the decimals of FX rates could result in significant variances for large transactions, which create challenges in FX revaluation, cumulative translation adjustment (CTA) rollforward, and intercompany elimination and settlement.

Lack of global policies

Many companies do not have global policies that govern all critical areas of ICA under M&A integration. For example, some companies have asset impairment policy in place, but do not have specific guidance to address the issues related to M&A integrations, such as when and how to determine the impairment amount for an acquirer’s investment in an acquiree company. Furthermore, roles and responsibilities are sometimes not clearly defined or are continually shifting, resulting in inconsistent accounting practices—increasing the possibility of handling tasks differently by deal or location.

Complex intercompany agreements and transactions

During the M&A integration journey, companies frequently enter into multiple intercompany transactions to transfer assets, liabilities, revenues, and costs to achieve tax benefits or other integration goals. Examples may include IP buy-in, transfer pricing, product and service collaboration, intercompany loans, and stockbased compensation. Many of these transactions involve particularly complex intercompany agreements, increasing the risk of misstatement and unreconciled intercompany balances. Furthermore, cross-border intercompany transactions are subject to specific tax laws and transfer pricing requirements. Misclassified profits between countries may result in tax penalties, interest, and reputational damage.

Potential ways to address these ICA challenges in M&A integrations

Bridge the gaps in different financial systems

Even though it takes time to integrate different financial systems, companies can still explore solutions to improve efficiency and transparency for reporting and settlement during the interim period of integrations. Instead of taking a reactive approach to resolving intercompany variances during the tight closing window, companies can create an interim process that enables them to resolve many of the variances more efficiently. For example, suppose the intercompany positions’ subledger details are unavailable in one financial system. In that case, the local accounting teams can build a template in a shared folder to share subledger details before and during close regularly. For those companies without real-time reporting capabilities, estimates can be provided to reduce intercompany variances. Subsequently, teams can investigate and resolve many intercompany variances timely and speed up the close process.

Align the source of FX rates

Companies should evaluate the FX implications when they enter into M&A transactions with multiple currencies involved. In the case of the acquiree applying a different source of FX rates than its acquirers, the acquiree should consider adopting the acquirer’s source of FX rates to avoid additional causes of intercompany variances. Suppose the adoption of the acquirer’s FX rates is not a feasible option in the short term. In that case, companies can create an interim FX policy with a materiality threshold to guide accounting and treasury and address the variances from intercompany netting and settlement.

Plan ahead and establish global policies

It’s critical to have a framework that provides a holistic perspective and incorporates key aspects of ICA in connection with M&A integrations. To start with, finance leaders can establish a vision for the future state. From there, they can develop a framework that identifies key areas related to M&A integrations and envision ICA as an interconnected, interdependent, end-to-end process. For each of the areas identified, companies can assess whether global policies governing critical areas are in place and further break each down into manageable pieces. Some of the critical areas include data and charts of accounts, transfer pricing, asset and liability transfers, and liquidation and dissolvement. After establishing the key areas, address each area’s component to standardize the accounting policies that guide everyone working from the same playbook. Establishing a holistic framework and comprehensive global policies up front could help companies mitigate risks in misstatement and potentially improve accounting and reporting efficiency.

Establish a center of excellence (CoE)

Even though most companies have separate functions to address acquisition- and integration-related issues, these issues are often complex and require cross-functional collaboration. Given this, it may be beneficial to establish a center of excellence with joint oversight from accounting, tax, and treasury that serves as a resource to help address intercompany challenges facing M&A integrations. Additionally, the CoE can develop a playbook that documents learnings and knowledge from past deals. The playbook complements the accounting policies and helps mitigate the risk of knowledge loss due to staff turnover.

Working with Deloitte Risk & Financial Advisory

Deloitte Risk & Financial Advisory’s Center for ControllershipTM has established an intercompany accounting framework with leading practices designed to help organizations transform ICA. The framework provides seven components that facilitate developing a customized road map for different organizations. With this road map, organizations can navigate the ICA transformation journey to help them meet their goals and tackle intercompany challenges in complex M&A integrations.

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