Intercompany accounting leading practices for transformation

May 11, 2020

A blog post by Beth Kaplan, managing director, Deloitte & Touche LLP

From globalization and regulatory scrutiny to widespread tax reform, many factors are affecting how companies need to address intercompany accounting today.

Intercompany accounting includes recording and reporting of internal financial activities, sales of products and services, cost allocations, and financing activities, to name a few. It consists of inventory transactions such as the supply of raw materials, finished goods, and direct shipments from a distribution center and noninventory transactions such as research and development charges, shared service transaction charges, and royalty payments.

Previously, we discussed some challenges facing intercompany accounting, as well as the journey organizations could take to streamline the intercompany accounting process. At the end of that journey, new technology implementation and program integration is the final step on the intercompany optimization process. The ongoing identification of business requirements and technology enhancements that address changing environments may help organizations find the right technology solutions for intercompany accounting leading practices.

Streamline and optimize the intercompany accounting process with technology

There is an opportunity for professionals to take advantage of the three most common emerging technologies that many organizations are either experimenting with or implementing to optimize intercompany transactions.

Many companies are beginning to experiment with various technology enablers for their intercompany accounting leading practices—which includes ERP cloud systems, process automation solutions, blockchain technology, and other third-party systems.

Before rolling out a pilot program and implementation plan, consider both the strengths and limitations of each of these new technologies to find an appropriate fit for your organization's unique challenges and goals for transformation.

ERP-based solutions

Enterprise resource planning (ERP) cloud computing-based solutions offer scalable, elastic technology that delivers services via the Internet rather than traditional on-premise architectures. ERP-based solutions are emerging as one of the leading technologies for intercompany accounting transformation by offering a single platform to access data across an organization with the flexibility to meet a wide range of needs for intercompany accounting leading practices.

Strengths

• Offers basic functionality for posting an ICA entry 
• Shorter and more efficient close cycles 
• Less time spent reconciling data from multiple systems 

Limitations

• Transaction-level reconciliation
• Workflow approvals in the cloud 
• Settlement and clearing limits

Process automation solutions

Process automation solutions, which are usually third-party vendor products, can perform a lot of different tasks that enable data integrity and transparency for intercompany accounting processes. Automation can form essential repositories for intercompany transactions; solutions can utilize robotics for process and workflow routing capabilities, automatically match transactions for reconciliation, and enable treasury workstations that provide improvement around the settlement and netting processes.

Strengths

• Intercompany transaction initiation through settlement and clearing
• Ability to reconcile at the transaction level
• Dashboard reporting and advanced analytics analysis
• Ability to post transactions systematically that cross ERPs

Limitations

• Limited automation for inventory transactions
• Cash settlements require treasury system support

Blockchain

Blockchain is a distributed ledger that allows the transaction of digital assets in a real-time and immutable manner, taking the intermediary out of the equation. Integration with blockchain can reduce the volume and complexity of intercompany reconciliations by getting data right at its origination. It may also help lower costs, facilitate efficient and secured transactions involving almost all types of data, and potentially lead to better transparency.

Blockchain has some core capabilities that may benefit intercompany transactions. However, it is still an emerging technology with a low adoption rate, since it is an extension of a capability rather than a solution explicitly designed through an accounting lens.

Strengths

• Reduces the volume and increases speed and accuracy of reconciliations using “smart contracts”
• May offer automated, high-fidelity, and low-cost mechanisms for recordkeeping
• Enables a scalable distributed ledger

Limitations

• Distributed ledger versus traditional dual-entry accounting (physical ledger)
• Not specifically designed for an accounting system