Transforming intercompany transactions accounting

April 6, 2020
A blog post by Beth Kaplan, managing director, Deloitte & Touche LLP

Intercompany transactions have always been a complex process. But for many companies, that complicated process feels more like a monster—messy, potentially scary, and too big to control. From regulatory scrutiny and widespread tax reform to globalization and the escalating, frenetic pace of business and data, several considerations are influencing how companies should address the intercompany transactions process. As one of the most labor-intensive aspects of the financial close, there is a growing need to create efficient, well-controlled, and streamlined processes to transform the intercompany accounting model.

To develop an optimal path toward intercompany accounting transformation, organizations must first identify the common challenges facing the process, work with a roadmap and intercompany accounting framework, and utilize technology enablers to improve the chances for a successful intercompany accounting journey.

Challenges facing the intercompany transactions process

Intercompany transaction 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 or 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.

There are some common pain points that many organizations often find themselves struggling with and that can lead to challenges with the intercompany accounting process. These challenges often lead to an increased level of effort and a higher probability of error in key process areas across finance.

Transaction volume is an ever-increasing challenge as organizations struggle to keep up with increasing amounts of data and documentation requirements. For example, some organizations may have more than one million intercompany transactions and require significant manual effort to perform reconciliations at month-end. This often causes a lack of visibility into transactions and out-of-balance intercompany accounts.

Disparate systems and unstandardized intercompany data are challenges facing organizations that are experiencing business growth without system alignment. Disaggregated data sources, invoices without links to intercompany transactions, and manual interventions for transactions between entities are all common in today’s environment.

The process complexity of intercompany accounting is like a "big elephant" in the room—or rather, the wild beast that needs to be tamed. The intercompany transactions process has often been complicated, misunderstood, and underinvested—resulting in inefficiencies, inconsistent rules, and a lack of transparency. Mounting regulatory considerations, globalization, and the surge of data volume have exasperated the already complicated process. However, as it often happens with an upturn in complications, challenges create a space for innovation, and innovation generates an opportunity for transformation.

Planning your intercompany accounting transformation journey

Intercompany accounting is a huge beast—so to get everyone in your organization aligned in the case for transformation to make it scalable and sustainable is critically important.

—Katie Kokol, finance director, Johnson & Johnson

The intercompany accounting framework

Before embarking on planning a journey to optimize your intercompany accounting process, it is important to consider seven key components that make up Deloitte’s proposed intercompany accounting framework. Deloitte’s intercompany accounting framework facilitates process optimization by focusing on seven critical areas supported by four enablers. The framework fuels transformation by helping organizations navigate the complexities of intercompany accounting, prioritize improvement opportunities and begin the transformation journey.

The roadmap for intercompany accounting transformation

Deloitte’s intercompany accounting framework offers seven key steps recommended as organizations begin their journey to optimize their intercompany transactions processes.

The intercompany accounting transformation journey really starts with a baseline effort—education, engaging the stakeholders in your organization, and educating them on the risks and rewards that are posed by intercompany. This creates an understanding of the relative benefits case and an agreement to move ahead with planning.

—Kyle Cheney, partner, Deloitte & Touche LLP

There are three categories of emerging technology popular in the intercompany accounting environment: ERP systems, process automation, and blockchain solutions. We will go into detail about each of these solutions, as well as the strengths and limitations for each, in part two of the intercompany accounting transformation journey. Stay tuned, as we will explore ways to optimize intercompany transactions with emerging technology and new strategies that may streamline the accounting process.

Listen to the full intercompany accounting webcast to hear Deloitte's Center for Controllership discuss strategies for transformation with industry guests and accounting professionals.