Taxing Matters: Tackling Intercompany Accounting Challenges

How smart companies are using technology and automation to overcome key intercompany accounting hurdles.

The recording of financial transactions across different legal entities, but under the umbrella of the same parent company, intercompany accounting (ICA) presents unique challenges for companies that lack established processes for managing these intricate requirements.

For companies that rely on manual processes and/or multiple different enterprise resource planning systems (ERPs), managing intercompany accounting is a time-consuming, error-prone process.

Without a single source of truth to work with across all of a firm’s divisions, accounting departments are often left scrambling to get the data and information they need to file accurate financial records and taxes.

Key Points to Consider

According to Deloitte, intercompany accounting applies to financial activities and events that cross legal entities, branches, and national borders. Those activities include, but aren’t limited to:

• Sales of products and services
• Fee sharing
• Cost allocations
• Royalties
• Financing activities

“ICA is a broad area that, while rooted in accounting, has extensions into various functions, including tax, treasury, and finance,” Deloitte states.

In fact, intercompany transactions for large multinational corporations can often dwarf their external sales, sometimes by as much as a factor of 10 or more, Deloitte reports. And, according to the United Nations Conference on Trade and Development, about 80% of global trade takes place within the value chains of large global organizations.

Don’t Fall Into the ICA Trap

Recent headlines prove just how much of a headache intercompany accounting can be. According to Deloitte, regulators have responded to these issues by focusing more closely on intercompany transactions and accounts (i.e., the Public Company Accounting Oversight Board [PCAOB] amending Audit Standard No. 18—Related Parties, which outlines specific ways to evaluate a company’s identification of, accounting for, and disclosure of transactions and relationships between itself and its related entities).

In a recent survey, Deloitte found that:

• 50% of companies lack defined ownership of the intercompany process and challenges with visibility by management into the process and key activities.

• 54% have manual intercompany processing with limited counterparty visibility to support reconciliation and elimination.

• 30% noted significant out-of-balance positions that require frequent use of “plugs” in order to be balanced.

“Remarkably, given the environment, many organizations view the intercompany process as something that just needs to ‘get done,’” Deloitte points out. “…this has created an environment in which organizations struggle with the time-intensive requirements to manage an effective and strategic intercompany program that is driven by inefficient processes and systems that have been pieced together and neglected over time.”

Overcoming the Hurdles

Intercompany accounting is time-consuming, difficult, and labor intensive, and the blending of disparate systems and manual processes is one of the biggest hurdles for companies, followed by merger and acquisition (M&A) activity that infuses new layers of complexity into the operational environment.

Other challenges include:

• For accounting departments, the lack of data visibility across entities, subsidiaries, and transactions can quickly lead to accumulated material write-offs.

Solution: Use software that automates intercompany transactions, tracks the related balances, and keeps accounting transparent, accurate, and auditable across all entities.

• Disputes over the correctness of an invoice, exchange rate discrepancies, or disagreements over the right way to settle a specific account.

Solution: Centralize the intercompany accounting function in a way that automates manual processes and reduces back-office costs. You’ll be concurrently reducing global compliance and tax risks, and optimizing resource efficiency.

• The proliferation of email and spreadsheet-sharing that takes place as the parties try to figure out the problem—yet another major time suck for busy accounting departments. “These disputes often happen after the fact and increase the amount of time required to reconcile the affected accounts,” Blackline states.

Solution: Reduce the amount of time accounting staff spends trying to find information and keep your intercompany accounting processes running smoothly with a platform that utilizes rule sets, and that updates those rule sets as your organization grows.

Smart companies are turning to technology and automation for help working through their intercompany accounting challenges while also reducing audit risk and ensuring good business practices.

Leverage FourQ’s Solutions

Once a firm reaches a certain size, the odds that it will be involved in some type of intercompany accounting grow exponentially. Put simply, this isn’t an issue that’s limited to large, multinational corporations. Companies of all sizes must factor this in once they start expanding and growing into multifaceted entities.

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.

With your automated intercompany reconciliation process 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. Schedule a free consultation today.

By Jeremy Womer August 14, 2020