Easing the Pain of the Intercompany Year-End Close

Closing out the books for intercompany presents an enormous challenge for controllers, most of whom are just beginning to recover from tackling the year-end close.

When transactions don’t tie out from period to period and unreconciled balances are carried over, they’re left to controllers to sort out the mess at the end of the year and face what must be written off. Kicking the intercompany can down the road, so to speak, saddles controllers with the unenviable task of having to correct a huge number of unreconciled intercompany transactions—in the hundreds of thousands for large multinational corporations—requiring them to spend days and nights tracking down source information from different international entities.

It’s a time-consuming, frustrating process that can lead to entity-to-entity conflicts and low employee morale (and, since many corporations are struggling to retain workers, it’s a bad time to push staff and controllers to their limits). These challenges are exacerbated in firms that rely on manual processes and disconnected data systems. These companies can only hope to net to zero. Not only that, they also run the risk of working with inaccurate data that’s called into question by auditors and international tax regulators.

Multinationals can avoid these issues, however, by making holistic changes to their intercompany operations and implementing Intercompany Financial Management (IFM) best practices. By taking the time to make these changes—changes that include adopting solutions that automate intercompany processes—they can close out their year-end books relatively quickly and produce reports that they are confident can pass muster with external auditors and other authorities.

To understand how multinational corporations can realize these benefits, let’s look at how most traditionally handle the intercompany year-end close and then delve into what changes they can carry out to make the process a lot less painful.

The intercompany close is fraught with issues that plague corporations regularly. They include poorly executed intercompany agreements, incorrectly booked invoices, entity-to-entity disputes, and siloed operations and disparate ERP landscapes stitched together that aren’t designed for intercompany transactions. According to a Dimensional Research/BlackLine survey of intercompany stakeholders, a vast majority of respondents acknowledged that their firms were plagued by intercompany challenges:

• 96% of respondents reported challenges with intercompany

• 96% agreed that ERP systems only partially solve intercompany challenges

• 90% said their staff regularly pulls all-nighters as a result of intercompany

• 97% said intercompany challenges negatively impact overall business outcomes

Grappling with the intercompany year-end close poses an added set of nightmarish challenges for controllers. Not only must they struggle to reconcile transactions and write-offs that have accumulated over the year, but they also face the added pressure of providing accurate reporting for tax filings.

It’s especially problematic for large, publicly traded companies that face the most scrutiny. If their financials are called into question, perhaps due to big changes in revenue or losses, they could be forced to restate millions or even billions of dollars of intercompany transactions.

The cost of such restatements not only negatively impacts the bottom line of multinationals. It can also damage their reputation in the eyes of shareholders and global markets.

Two driving forces that negatively impact the intercompany year-end close are:

1. The way multinationals are set up

2. How they process intercompany transactions

Multinationals are not neatly organized ecosystems with centralized operations. Because these behemoths are continuously evolving through reorganizations, acquisitions and mergers, they are by their nature convoluted amalgamations of entities, each of which has different time zones, currencies, and tax laws.

To make matters worse, when entities are brought into the fold, they come with their own accounting systems and ERPs. These systems, which are often outdated and inefficient (and generally not designed to manage intercompany transactions), typically can’t talk to each other without a great deal of human intervention.

As multinationals continue to work with these disconnected systems and spend untold numbers of hours chasing fragmented, inaccurate data, it’s no wonder that the year-end close is fraught with unreconciled billings, frustrated teams, disputes, and long nights.

What should be happening is an entirely different picture: To operate in an efficient and healthy manner, multinationals should always be working with a single source of truth—consistent data that is managed in a centralized location and easily visible to and accessible by all parties.

Is it even possible for multinationals to mitigate intercompany issues and work with a single source of truth? The answer is yes for those that are willing to modernize their intercompany processes.

IFM practices involve the adoption of best-of-breed technologies that are designed to streamline intercompany operations. According to the Dimensional/BlackLine survey, 97% of respondents said they would benefit from better intercompany solutions (with automated intelligent intercompany analytics topping the list).

Multinationals that implement IFM achieve the following benefits:

• Eliminating siloed operations and creating a central point of contact for all entities.

• Providing a single process for collecting and distributing intercompany financial data.

• Ensuring that invoices are booked into the right accounts and transactions are tied out in a timely manner.

• Keeping to close deadlines by making clear when intercompany charges must be billed.

• Improving standard processes for accounting teams, including new members, and providing standardized documentation on intercompany processes.

• Providing visibility across all entities, allowing firms to settle quickly when necessary.

One of the biggest improvements that IFM offers is analytical visibility that enables controllers to spot and correct and settle discrepancies early, well before the year-end close takes place. BlackLine’s Intercompany Solutions, for example, translate relevant data into compliant invoices and documentation to support intercompany transactions, provide analytics insights that are visible throughout the enterprise, and help companies reduce their time to close.

In an era of global mergers and acquisitions, labor shortages, and changing tax regulations, it’s the right time for global corporations to adopt IFM practices. But this approach has benefits that go beyond financial management.

Companies will protect and improve their reputation by consistently meeting tax requirements and avoiding restatements. Year-end closing becomes less stressful, improving employee morale and retention of skilled talent. And the whole of the finance team can turn their focus to value-added efforts that meaningfully improve profitability, performance, and growth.