This article originally appeared in SSON. It’s a 6-minute read.
Intercompany transactions now represent the lion’s share of the global economy—some 80% of global trade. And as F&A teams around the globe continue working remotely, it’s become even more critical to address and overcome the mounting intercompany accounting challenges.
Enterprises are strengthening cash management strategies by creating multilateral netting and further settlement procedures to reduce bank fees and better manage FX. Within entities, intercompany trade is also placing pressure on local accounting teams, who are facing growing numbers of associated reconciliations, which drains efficiency and often leads to rolling intercompany balances.
Corporate Accounting and Shared Service Centers are looking for greater visibility within local accounting teams to understand bottlenecks and reduce financial reporting risk.
Intercompany Accounting Is Becoming Increasingly Complex
Through growth and acquisition, new entities and subsidiaries are rapidly emerging, creating a diaspora of acquired and legacy accounting technology. Different ERPs are left in play, which reinforces separate accounting structures and allows transactional silos to form between parties and counterparties, making it difficult to manage unreconciled balances. There also tends to be little in the way of a documentation trail.
Shared Service Centers can often reach an impasse with intercompany, struggling with a lack of visibility into subsidiary intercompany reconciliations, and facing issues reconciling transactions across different—and often relatively opaque—invoicing and receivables systems.
It all means the financial close can drag on. Or worse, corporate ends up using plugs to paper over unreconciled balances that effectively mask accounting errors and control deficiencies.
Intercompany Technology Moves to the Fore
In recent years, new technology has posed an intriguing option to cope with change. For example, one survey found that 82% of accounting and finance teams thought technology could help with pressing intercompany issues, such as transfer pricing and its surrounding compliance and documentation.
Robotic Process Automation (RPA) can now use matching rules to perform intercompany matches based on tolerance levels, identifying exceptions automatically, which is ideal for managing growing intercompany transaction volumes.
An intercompany hub enables enterprises to centralize documentation, transactional details, intercompany agreements, and pricing while acting as an ERP-agnostic connective tissue between different entities.
The meteoric rise of cloud computing also promises a side benefit for corporate and subsidiary teams: web-based access to intercompany transactions and policies from anywhere. It’s naturally a better platform for cross-enterprise collaboration, rather than locking identical information behind different organizational silos and user experiences.
Ten Keys to Strong Intercompany Accounting
Technology is proving to be a game-changer, especially in our current virtual environment as companies continue working and closing remotely.
Here are ten ways your F&A teams can begin utilizing technology to streamline and strengthen intercompany accounting at your organization.
Use a centralized Intercompany Hub to overcome the disparate ERP issue. Move toward a centralized clearinghouse to manage all intercompany transaction records, corresponding journal entries, statuses, supporting documents, currency rates, transfer pricing rules, and policies—all in one place.
Use ERP Connectors to Unify Disparate ERPs
A big issue around intercompany accounting is often the sheer number of ERPs and other systems in play. Using an intercompany solution with a rich array of pre-built connectors to typical data sources like Oracle, SAP, Sage, and Microsoft Dynamics reduces hand-coding and speeds up the deployment of intercompany process centralization.
Standardize Policies & Procedures
Effective intercompany accounting begins with standard global policies to govern critical areas, such as data flow and stewardship, approval processes, managing charts of accounts, tax management, transfer pricing rules, currency rates, and documentation.
By first centralizing and then standardizing, you’ll be in a better position to, for example, assess transfer pricing documentation annually, compare it to requirements in each jurisdiction, and make centralized changes.
Define & Track Workflows & Approvals
A lack of visibility into where transactions are with SSCs often frustrates BU leaders, and can cause them to begin scaling their own duplicate functional areas. Use a common platform for processing financial close tasks, reconciliations, and other areas that provide every stakeholder with a clear view of progress.
Consider Creating a Center of Excellence (CoE)
In unison with upgrading intercompany technology and processes, consider creating a centralized Center of Excellence that consists of stakeholders from accounting, tax, and treasury. This also ensures global standardization and orchestrated resolution of intercompany issues.
Use Rules-Based Intercompany Reconciliation
Intercompany reconciliations can easily drag down local accounting teams, slowing and creating risk in the subsequent corporate close. Use rules-based matching technology to enable entity accounting teams to focus on exceptions.
Purpose-built technology like BlackLine can easily match transactions between one legal entity and another, and auto-certify accounts.
Optimize Cash Management Processes
Forty-seven percent of organizations surveyed by Deloitte said they only had ad-hoc netting capabilities in place, with no defined calendar. This can lead to uncertain tax positions and unexpected volatility in profit/loss.
Put a cash management strategy in place for netting and settlement around intercompany transactions. Bilateral and multi-lateral settlement on a specified calendar can help cut down bank fees, ensure better use of cash, and improve currency hedging strategies.
Sweat the Details―Be Audit Ready
The risk of an audit around transfer pricing has never been greater. It’s wise to assume the worst and be ready, especially given the often-small timeframe to respond. A centralized hub can help. But, ensure that you can drill down into specific initiator-recipient relationships to view the associated transactions.
For countries that require invoices attached to intercompany transactions, use automation to ensure corresponding invoices are always attached upon final state certification.
Use the Cloud to Get Everyone on the Same Page
When dealing with a geographically and organizationally dispersed team, cloud computing is particularly valuable for intercompany accounting. Modern cloud applications provide an anytime/anywhere, centralized, familiar user experience for everyone—from subsidiaries to corporate—to access, update, and monitor intercompany transactions and approvals.
Strive for Corporate Visibility
Lack of subsidiary and intercompany visibility can be one of the biggest frustrations for corporate accounting teams and Shared Service Centers. Using an Intercompany Hub enables corporate to see where entities are in the close process without waiting hours for a report from a business unit in a different time zone or country.
It also enables easy creation of reports to show balances, exceptions, and variances across entities that may impact the corporate close.
Read this ebook to learn how to overcome the increasing challenges of intercompany accounting and build a more sustainable and agile finance function.