Intercompany accounting framework and leading practices

May 17, 2019

A blog post by Katie Glynn, senior manager, Deloitte & Touche LLP and Anastasia Traylor, senior manager, Deloitte & Touche LLP

A manufacturing company faces a federal grand jury investigation involving intercompany cash transfers related to its tax planning.

An insurance company is forced to restate its financial results stemming from its failure to eliminate certain intercompany transactions related to variable-interest entities.

An offshore drilling company is levied fines and penalties due to untimely and incomplete filings of financial statements in a foreign jurisdiction

The costs of a fragmented, manual, and non-standardized intercompany transaction processing and accounting can be significant. It is a process that has typically evolved over time “by default” as opposed to “by design;” but an evolving financial environment and digital transformation have been a catalyst for organizations to rethink, restructure, and redesign the intercompany accounting process. Tax reform, growing regulatory scrutiny in the US and local jurisdictions, and an increased focus on operational efficiency offer a challenge and opportunity for companies to optimize the intercompany accounting process to reduce risk of regulatory and statutory non-compliance, provide for effective tax planning, and achieve a more standardized, sustainable, and cost-effective operating model enabled by technology.

Before we tackle the concepts of redesign and technology-enabled transformation, it is helpful to first highlight the components of the end-to-end intercompany accounting process and the leading practices that may align with a company’s multi-disciplinary intercompany-focused objectives from the perspective of controllership, tax, treasury, and the overall vision across a broader organization.

Harmonizing intercompany accounting with the four enablers

The lifecycle of an intercompany transaction affects more than just the controllership organization. While the controllership team is often held accountable for the outcomes of intercompany transactions, a cross-functional, proactive approach is needed to optimize the end-to-end process, reduce risks on multiple fronts, and provide improved transparency for the wide range of stakeholders involved. With an optimized end-to-end process, organizations are better positioned to address the complexities resulting from the interaction of outcome requirements from controllership, tax, and treasury stakeholders.
Rather than attempting to predict and prepare for a multitude of function- and geography-specific risks, such as non-compliance with tax and regulatory requirements, a broad approach utilizing the following four classic enablers, historically overlooked in the context of intercompany accounting, can bring harmony to the intercompany transaction lifecycle and help organizations improve business performance.

Governance: Process standards and defined policies driving improved oversight

• Well-articulated intercompany strategy to provide clear and understandable guidance
• Procedural mechanisms to address concerns and resolve issues and conflicts
• Coordination and oversight of the transactions between both intercompany trading partners and business stakeholders
• Establishing, enforcing, and maintaining standard policies and procedures
• Defining and monitoring established key performance metrics (KPIs)

Process: Centralized and standardized intercompany treatment for end-to-end transactions

• Standardizing and clearly defining policies and procedures
• Establishing and consistently applying process rules, authorities, and materiality thresholds
• Defining and employing data standards for intercompany data attributes
• Intercompany accounts isolated from other balance sheet accounts

People: Centralized management solution

• Implementing an operating model with formalized cross-functional process ownership
• Documenting and communicating roles and responsibilities supporting segregation of duties
• Accessible and available training materials, policy and procedures, templates, and other tools
• Establishing a center of excellence (CoE) group to oversee intercompany transaction processing effectiveness and efficiency and to facilitate issue resolution

Technology: Enterprise resource planning (ERP) or third-party applications

• Ongoing identification of business requirements associated with technology enhancements to address changing environments
• Centralized data repository to allow access to timely and accurate information and enable robust reporting
• Technology enhancements to efficiently establish trading relationships, initiate transactions, track required approvals, and automatically match and reconcile transactions
• Integrating front-end controls into automated processes and utilizing exception reporting

Leading practices for an intercompany accounting framework

Engineers solve complex problems by breaking them down into manageable components. Deloitte’s intercompany accounting framework facilitates process optimization by focusing on seven critical areas, supported by the four enablers. The framework fuels transformation by helping organizations navigate the complexities of intercompany accounting, prioritize improvement opportunities and begin the transformation journey. It enables a more effective implementation and integration of emerging technology and digital solutions. Through the application of this framework, organizations can tackle common challenges arising from global pricing strategies, non-standardized processes, data quality and availability, and difficulties with transaction matching and account reconciliation.

Explore the framework below to learn more about the seven pillars, how your current capabilities stack up against the leading practices, possible opportunities for digital transformation, and where your organization might look to target improvements across the intercompany accounting process.

Taking action with an intercompany accounting framework

Taking action to implement the framework, as defined above, may yield tangible benefits and enable desired outcomes, such as creating a more efficient elimination, consolidation, settlement, and reporting process. Financial reporting integrity across global entities and reduced exposure to penalties, unintended taxable events, and foreign exchange losses are also possible outcomes. If your organization is looking to transform to enable a “by design” intercompany accounting process, here are some specific action items you might explore:

• Define your organization’s intercompany accounting challenges and risks
• Identify stakeholders, build a team and establish ownership
• Agree on a framework for a cross-disciplinary approach
• Leverage leading practices for a future state vision
• Consider technology options for optimal efficiency

Stay tuned as we further explore how to utilize digital transformation and digital controllership in intercompany accounting transformation initiatives.