Multinational accounting teams are no strangers to intercompany variances. An intercompany variance occurs when two parties book transactions against one another that do not net to zero. In other words, the numbers booked do not mirror each other at an exact amount.
An example of this would occur when Party A owes Party B a certain amount of money. Each party should book an entry that reflects that amount so that intercompany accounting nets to zero with no variance. However, Party A may need to take some taxes into account or perhaps they decide the foreign exchange (FX) impacts the amount booked. When a number changes, a variance is created that must be addressed.
Intercompany variances happen for several reasons. Invoices can get lost or held back when one entity is backlogged or wants to book an entry in a different month or quarter. The payer may also only agree with half of what is charged so it ends up booking only part of the transaction. Discounts may or may not be booked in a similar way. A shared service center may not have knowledge of the intricacies of a transaction. For example, they may not be aware of withholdings or if there is a communication breakdown that impacts the transaction.
Identifying intercompany variances
Intercompany variances typically come to light when the accounting or closing controllership team rolls up the books for a particular sum center (e.g. HR or marketing) or a common geography discovers that things aren’t netting to zero, which they should. Accounting and finance teams must then drill down to ascertain what is not matching up and why. Sometimes the variance can be escalated to upper management, depending on the volume and why entities are disagreeing on how the transaction should be handled.
When the accounting or closing controllership team find intercompany variances, they might get the opposite sides of an intercompany transaction together to clarify where the variance happened. This often means connecting people assigned to the different cost centers and having them dialogue to figure out the disconnect. It typically involves a lot of back and forth, and investigation. It can become a very tedious and annoying process with many different people involved.
Facing the fallout
The impacts of intercompany variances range far and wide. The biggest impact of an intercompany variance is a delayed close which means companies cannot report on their financials. Local tax returns can also be impacted. If someone does not report an amount or reports it incorrectly, it's going to impact their taxes and the actual numbers being reported to the local tax authority. Income could then be overstated or understated, which means the company could pay more or less tax, resulting in more work and possible penalties.
Intercompany variances may also alter what was previously reported to corporate and require revision after the fact. It's a huge headache for accounting teams who, as they get closer to closing their books, start to discover previously hidden intercompany disconnects that add up to big money. Suddenly, the numbers materially change, and they must determine which of the various legs of the accounting process are impacted.
How We Can Help
FourQ (recently acquired by BlackLine) can help companies manage the entirety of their intercompany accounting process, minimize administrative costs, and decrease the time required to close. For example, FourQ is able to book both sides of a transaction to help solve intercompany variances. By booking for both the buyer and the seller, issues are addressed before they become problems.
FourQ’s solutions also maintain the detailed reporting of what gets booked from buyer to seller. This data transparency is key when working out exactly what entity owns which cost. FourQ provides insight into who submitted the cost, who owns the cost, and other details which ensure accuracy and avoids delays.
