November 11, 2021

Intercompany Transactions: Going Global With Modernization

6-minute read

Some of the most significant modernization opportunities are global. For example, intercompany transactions now represent the lion’s global economy share—some 80% of international trade.

So, if your company has multi-entities, they’re likely one of the frequent transactions running through your company. And while Shared Services Centers (SSCs) have been running for years, tremendous opportunities remain to modernize in many cases.

Many accounting leaders often steer away from intercompany accounting, as it can be a thorny topic. The reason is that it touches so many parts of the company. This chapter will explore some techniques to start getting your arms around it that get buy-in from tax, treasury, accounting, and legal. And you’ll learn where to start looking to boost SSC productivity by, in some cases, 20%.  

Fix the Monster Under the Bed: Intercompany Accounting

We live in an era of global trade, mergers and acquisitions, and increasing tax regulations. It’s a growing headache for accounting, tax, treasury, and legal teams.

In one survey by Deloitte, nearly 80% of respondents were frustrated about intercompany accounting. The most prominent issues are often around disparate software systems within and across business units and divisions, intercompany settlement processes, management of complex legal agreements, transfer pricing compliance, and FX exposure. And intercompany accounting often causes a major delay to issuing financials, with elimination and consolidations processes often getting tripped by imbalances.

According to Audit Analytics, historically foreign, related party, subsidiary, and intercompany issues have been the fifth-biggest reason for restatements. Why did it all get so complicated?

Taking a step back, it comes down to four typical reasons:

*   A giant hairball of systems from accounting, to tax and treasury. Intercompany accounting is often a complex process that involves multiple systems, such as different ERPs, sub-ledgers, and other applications in each subsidiary, often compounded by years of M&A and numerous entities.

*    Opaque intercompany settlements. The lack of transparency from manual processes and disparate systems complicates intercompany settlements when entities identify discrepancies in foreign exchange rates or invoice accuracy.

*   Laissez-faire legal agreements. Many companies don’t have agreements in place, or they are just unclear. In other cases, they have terms that are not fulfillable because of a country’s restricted status. The increasing complexity of legal agreements, contractual terms, and transfer pricing rules is a risk in a growing regulatory environment.

*   Transfer pricing. These processes are usually spread across different functions with multiple hand-offs, which all often create challenges around legal entity margin management and managing overall tax liabilities.

Don’t be fooled that a single ERP instance will solve the problem. Many entities often keep other subledgers in place to handle specific local accounting needs outside the ERP that spread out transactional detail. And usually, local, country-level, and regional tax local, country-level, and regional tax requires additional detail based on the tax-jurisdiction of each party that took part that isn’t in the corporate ERP.

Establish a Center of Excellence

Start by tackling one of the significant challenges. There are just so many people that have a hand in intercompany accounting across departments and entities. And it cuts across many processes: order-to-cash, procure-to-pay, and period-end.

Begin by bringing stakeholders from all the key groups together by establishing a Center of Excellence. For your CoE, you’ll want to consider how you’ll handle and standardize aspects such as pricing agreements, dispute resolution, and regulatory compliance in a structured rather than ad hoc way.

For your first set of CoE meetings, establish ownership, and build your company blueprint from your stakeholder:

*   Accounting. Identify opportunities to improve intercompany reconciliations, dispute processes and gain more clarity around transaction agreements.

*   Treasury. Drill down into procedures around cash management, netting, settlement, and loans. Identify where there is FX exposure.

*   Legal and tax. Look for recommendations to standardize processes and agreements around transfer pricing and loans. Discuss current and evolving tax reporting risks.

*   Finance IT. Inventory all systems that play a part in IC and document the data flows across teams, entities, and processes, to identify streamlining opportunities.

*   Operations and supply chain. Define how to bring together a supply chain on an end-to-end basis, based around best practices and standard procedures for posting and paying and intercompany transactions. The end goal should be integrated accounting procedures that improve supply chain adaptability, speed, and visibility.

Tax regulation is a rapidly evolving area when it comes to intercompany accounting. Governments and tax authorities are cracking down on profit shifting to raise tax revenues. PCAOB Auditing Standard 2410, the OECD’s Base Erosion and Profit Shifting (BEPS) agenda, and other EU, US, and local country tax law changes are all taking center stage. And there’s set to be more in the future, get ahead of them, understand tax impact, and reduce risk.

Centralize & Standardize

After evaluating your process, the next step is to start actively centralizing and standardizing parts of it using technology.

There are multiple options to consider: basic cloud stores can centralize legal agreements and templates. Online checklists and workflows can ensure intercompany best practices are followed. Further, purpose-built intercompany hubs can streamline the entire end-to-end process.

Whether you build it or buy it, the ultimate vision should be to move to a centralized clearinghouse to manage all intercompany transaction records, corresponding journal entries, statuses, supporting documents, currency rates, transfer pricing rules, and policies:

*   Centralize. House all transaction records, statuses, supporting documents, and corresponding journal entries, and invoices in one place.

*    Standardize intercompany legal agreements where possible in a document store and use workflow management to control how intercompany transactions are initiated, approved, validated, booked.

Centralization and standardization together can enable one more benefit: enabling teams to drill down into specific initiator-recipient relationships to view the associated transaction and get a birds-eye view of balances, exceptions, variances, and settlement and clearing status across entities.

Delve into your IC process, and you’ll no doubt find that teams waste a considerable amount of time just getting access to the data they need for tax reporting, resolving disputes, or finding supporting detail.

Spend some time identifying all your systems at play, and rank where teams spend the most time wrangling data from. For example, it may be specific ERPs and subledgers or other sources that house data for trade, non-trade, services, intercompany loans, leases, legal, or freight.

Then identify where it makes sense to build integrations that automate repetitive manual data extractions.

Get your copy of the digital book to understand the real cost of manual accounting processes and discover how you can eliminate and automate them to focus on more strategic work.

Tammy Coley

Modern Accounting