Intercompany Reconciliation: Using Automation to Manage Complexities

Companies can use automation to eliminate intercompany transactions and balances without spending hundreds of valuable accounting hours on the process.

Intercompany reconciliation, the process of recording financial transactions across different legal entities that all have the same parent company, impacts organizations of all sizes.

“Quick and accurate intercompany reconciliation is a challenge for most large global enterprises, whose subsidiaries and business divisions are frequently trading with each other, generating high volumes of intercompany accounting transactions,” Financier Worldwide states.

“Subsidiaries and business divisions are often separate legal entities operating with a high degree of autonomy across dispersed geographies, and are also likely be operating in multiple currencies, in different time zones, and using different accounting systems.”

Transactions across these entities must align as part of the month-end financial close process with any potential disputes (e.g., mismatched order and invoice references), and they must be resolved to ensure complete accuracy of company reporting. A parent company that “sells” goods or services to one of its subsidiaries, for example, or that shares fees or costs across those entities, is not allowed to include the related loss or profit on consolidated financial statements.

The Role of Intercompany Reconciliation

Because intercompany transactions can artificially increase a parent company’s assets, liabilities, income, and expenses, ensuring a truly consolidated financial position and performance must include the elimination of intercompany transactions and balances.

If a subsidiary records a receivable from its parent company, then the latter should record a “payable” to that subsidiary. “If everything works fine and in time, the amounts of the receivable and payable can be safely eliminated during consolidation,” SAP states. “However, in reality, things may not always be smooth. Sometimes, entity B just forgot to record the payable.”

According to Simplestudies, efficient reconciliation also helps companies:

  • Identify unrecorded transactions or balances on the books of individual entities
  • Minimize bank transaction fees
  • Optimize organizational liquidity
  • Reduce financial and currency costs
  • Minimize financial/accounting risks

Of course, the operative word here is “efficient.” Managed manually, the process of working through spreadsheets, files, and paperwork to identify and address discrepancies is actually both tedious and time-consuming. Multiplied across various entities and a high volume of intercompany transactions, the reconciliation task consumes valuable manhours.

Books have to be kept open for days (or even weeks) longer than usual, and the potential for out-of-balance intercompany accounts is high due to, for example, a disagreement across entities over which ones should or shouldn’t receive the charge.

Other key intercompany reconciliation challenges include, but aren’t limited to:

  • Sales that are recorded across different financial periods
  • Use of different accrual methods
  • Lost invoices
  • Differences in exchange rates
  • Disparate revenue recognition rules
  • Differing tax laws and legal structure (for multinational corporations)

Solving the Problem With Tech

To efficiently solve these issues while also creating a compliant accounting process across all their entities, more companies are automating the intercompany reconciliation process. By removing the manual tasks, the potential for errors, and the human oversight out of the intercompany reconciliation equation, these companies are effectively standardizing a critical aspect of their overall accounting processes.

Automating the process also allows accounting personnel to focus on exceptions versus having to manually certify every account. They can view the summaries of differences across entities and then address any instances where expenses have been recorded twice, allocated to the wrong entity, or encountered some other discrepancy.

In an interview with Forbes, Capgemini’s Marty Borcharding said he’s seen the benefits of automation range from more than 25% journal elimination, up to 90% reduction in time spent on intercompany reconciliation, and 70% reduction in time spent on closing and reporting.

Explore FourQ’s Solutions

FourQ’s OneBiller is the only full-service software solution that centralizes the intercompany accounting function of multinational organizations to automate manual processes and reduce back-office costs. It also reduces global compliance and tax risks, and optimizes resource efficiency without using a pricy license-based implementation model.

Using OneBiller, the third-largest organization in the world (ranked by foreign assets) centralized and automated the tax optimization and processing of over 500,000 intercompany invoices across more than 100 countries, translating into immediate ROI.

Here’s how it works:

  • FourQ’s team of experts collaborates with your team to understand your international footprint, compliance risks, tax exposure, invoice workflows, and key performance indicators (KPIs).
  • We develop specifications documents and outline gaps or optimization opportunities to drive return on investment (ROI).
  • We turn those findings into automated and optimized invoice workflows; streamlined acceptance and dispute processes; and up-to-date compliance documentation for real-time audits.
  • We set up direct enterprise resource planning (ERP) integrations that plug OneBiller into your existing technology platforms.
  • Concurrently, our tax team develops automated and optimized processes to mitigate incremental tax costs and penalties.

Service After the Sale

Once your automated intercompany reconciliation process is in place, FourQ provides the support your team needs to keep your intercompany accounting processes running smoothly. We ensure rule sets are maintained and develop/implement new rules, as needed. For example, we monitor international tax changes closely to ensure workflows are optimized for tax efficiency.

FourQ’s globally compliant, automated intercompany accounting and invoice management solutions have been battle-tested in the most complex environments in 120+ countries worldwide. Chances are high that whatever you are seeing, we’ve already seen before. To learn how we can help solve your organization’s AP processing challenges,  schedule a consultation today.

By Jeremy Womer August 10, 2020