Intercompany accounting is the process that records and manages financial transactions between different legal entities within the same parent company. Due to the fact these entities are related, the transactions between them are not “independent.” Companies cannot, therefore, include a profit or loss from these transactions on consolidated financial statements.
Intercompany accounting increases in complexity as it expands beyond accounting and finance into the tax and treasury department. Companies must analyze the value chain to properly execute accurate taxing policies and transfer pricing agreements. Detailed transaction information is required to understand cross-country netting rules and to consolidate for settlement.
The impacts of decentralized intercompany accounting practices include:
- Bottlenecks in processes and month-end close
- Lack of policies and procedures
- Limited governance framework
- Inconsistent chart of accounts and accounting practices across entities
- Disparate data sources
- Legal entity structures not aligned with business unit structure
- Increased scrutiny of local statutory reporting
- Difficulty complying with complex US and international tax regulations
Intercompany accounting can be labor-intensive and costly to manage. Limited cross-entity visibility often hampers the reconciliation of large volumes of data and tracing back errors to mitigate risk. Due to the fact it's highly distributed, there can be fewer controls and lower accountability.
Specific local tax laws and transfer pricing agreements must be followed to correctly classify profits across countries. Regulatory authorities increasingly require country-by-country reporting and access to detailed transactions. Cumulatively, these efforts drain valuable finance, accounting, tax, and treasury resources, create redundant work and outstanding balances, and elevate exposure risk.
What is its relationship to intercompany financial management?
Intercompany financial management is an approach to manage financial transactions systematically and efficiently within a corporation and between its legal entities. This approach utilizes technology and expert systems to integrate with and streamline multiple related business processes -- all in a unified manner. These processes include intercompany accounting, vendor invoicing, tax enrichment, reconciliations, settlements, and journal entry booking. The holistic approach is designed to maximize staff efficiency and accounting accuracy while optimizing tax exposure, minimizing tax leakage, and ensuring consistent tax and regulatory compliance.
Intercompany accounting processes are a critical contributor to IFM and must be modernized to enable improved IFM. Successful automation of a multinational company’s accounting processes will improve the bottom line, grant more financial rewards, and reduce the risk of restatement and reputational damage.
The intercompany tax function will also benefit from automating intercompany accounting processes. Evolved tax accounting processes help companies minimize tax leakage while hardening their tax compliance and defensibility. They allow these teams to optimize total tax incidence across multiple legal entities and to prepare for the increasingly complex tax and regulatory environments on the horizon.
The benefits of IFM transformation, including improved staff efficiency, accounting accuracy, and consistent tax and regulatory compliance procedures, will be felt across the organization. This is especially true wherever an uncoordinated approach to intercompany transactions or inconsistent/incomplete intercompany data impacts decision-making or outcomes. While the finance and accounting departments are obvious benefactors, your IT, HR shared services, Treasury, and tax teams will all enjoy the enhanced capabilities, too.
FourQ can help
FourQ helps companies centralize the management of intercompany processes, technology, and master data to create improved tax and resource efficiency while reducing operating costs. FourQ’s OneBiller solution automates intercompany accounting by translating relevant data into compliant invoices and documentation to support intercompany transactions, real-time audits, and improved transaction transparency while reducing operational costs.
The art of establishing company-wide process uniformity requires experienced intercompany pros. FourQ has guided consistency across customer organizations improving compliance and reducing risk. Uniformity and consistency are important defense lines in any transfer pricing audit as they communicate a sense of control and defend against disorder.