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Intercompany

What is Intercompany Recharging and How Does it Impact the Organization?

Learn best practice recommendations for managing expenses across various business centers within your company.

Jeremy Womer
Jeremy Womer

Mar 14, 2022

What exactly is a recharge in the world of accounting? It essentially involves providing a good or service to an entity and recovering the cost from the entity served on a fee basis. Therefore, intercompany recharging happens when one entity incurs a cost and then bills, invoices, or moves that cost to another entity in the larger organization. The goal is to accurately charge the entity that ultimately received the value of the good or service provided.

Notable examples of intercompany recharging occur when shared services, IT and telecom, or any costs that are centralized must be billed to their ultimate beneficiaries across the corporation. Charges for phone, computer, and networking usually come from vendors in one comprehensive invoice. That invoice might be paid by corporate, but corporate would have to split the invoice and “recharge” portions of the bill to the entities in the organization that used the service.

Two different approaches to intercompany recharging

Broadly speaking, intercompany recharging can be handled in one of two ways:

  • The very detailed allocation model - This method involves getting down to a per head cost with each line in an invoice allocated to the specific person or project it served. Then, that cost, such as a mobile phone expense, is charged to whatever entity that person rolls-up to in the organization. Challenges with this model occur when an individual doesn’t align easily to a single entity or when personnel changes happen within the organization. For example, people change roles, the billing or accounting information changes, or the organizational structure itself adjusts.
  • The more generic allocation model - This method involves setting a cost per person and allocating that figure to intercompany entities based on the number of people allocated to that entity. For example, a percentage of costs would be allocated based on headcount regardless of whether or not the people actually used the billed product or service. The challenge with this method is that it results in many disputes. Arguments arise because people disagree with how costs were allocated to their group. For example, a French entity might argue that their telecom costs are cheaper than the US or that only a portion of their team were given l Then charges must be debated.

When deciding which approach to intercompany recharging is best, consider three things.

First, an organization’s risk tolerance must be understood. This will help determine how precise to be. Risk averse companies will want their intercompany recharging to be more detailed to give them more support on how they allocate. Everything would be easy to trace back and serve as proof in the event of an inquiry or audit. Less risk averse companies, on the other hand, would take a more simplistic approach and not be too concerned about how the costs are moved around.

Second, consider the organization’s cost tolerance, i.e., how much it is willing to spend on being precise. This typically depends on where the business is in its evolutionary cycle. If it’s prospering and doesn’t believe it needs to worry about every detail on every line, then it won’t. But if the belief is that the organization needs to watch every cost, then the intercompany recharging will be broken down to the finest details.

Lastly, determine what the organization can operationalize and maintain. Find the sweet spot that provides enough detail that a consistent process can be maintained quarter over quarter, month over month, etc. Intercompany involves many functions which might limit what is possible. It all depends on those who are actually touching the data and reconciling it. There may be technology constraints where the systems just can’t handle all the data coming in. The account reconciliation team may not be able to handle the volume of transactions, and the people inputting the information can also become overwhelmed.

The trend toward more detailed allocation and greater transparency

Intercompany recharging practices are moving toward more detailed allocation and greater transparency. This contrasts with how the recharging process has been addressed historically when companies simply threw people at the problem or employed frontend technology overlaid with workflows.

Backend technology, such as spreadsheets or reports have also been used to reconcile accounts. However, this is more reactive than proactive and usually happens after the fact when the accounting team is trying to reconcile everything together.

Do it once, do it right

The intercompany recharging methodology that FourQ (recently acquired by BlackLine) specializes in eliminates disconnects booking both sides of the transaction at the same time. It also gives visibility to that data to deliver an understanding of what is billed, and what is being billed for. This process also enables good reporting. This is how FourQ provides full transparency into the intercompany recharging process.

The benefits of doing it right include less intercompany disconnects, which results in a more accurate and timelier close. Ensuring transaction allocations are right before they are booked also eliminates last-minute conversations with people trying to work out where disconnects happened and why. There is less chaos and churn. And if issues do arise, they can be resolved faster because teams can quickly see where disconnects exist.

Jeremy Womer

Jeremy is responsible for defining, managing, and measuring success throughout the customer journey at FourQ.  Before joining the company, he was co-owner and Vice President of Finance at Adirondack Cabling and Security where he ran cabling functions and focused on growing the organization’s profitability. Previously he worked as a Senior Advisor and Lead Analyst at the Boston Consulting Group and EY (Ernst & Young). Jeremy started his career in accounting at GE. Additionally, he is a CPA in New York and Georgia and holds a B.S. in Business Economics and another in Accounting with a minor in Finance from the State University of New York at Oneonta. He also has an M.S. in Business Administration with an Accounting concentration from Suffolk University. 

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