Every day, companies make decisions based on the data they collect. Most of us have a sea of data at our fingertips—whether we need customer information, transaction data, or marketing metrics, the likelihood is a wealth of data is available. So why then do so many companies struggle to use data effectively?
One of the significant challenges of financial consolidation is understanding whether or not the data is trustworthy and can be relied on to make critical decisions—a challenge that is particularly relevant for companies scaling quickly and adding multiple entities.
A study by Gartner found that poor quality data costs the average organization $9.7 million a year and the U.S. economy $3.1 trillion annually. This blog explores why poor data management ends up costing multi-companies, and the most effective solutions for data management strategy in financial consolidations.
Data is central to how we do business, yet many can fail to consider its effective management. Often, information is sourced from so many disparate systems that it can be impossible to consolidate it or obtain a single source of truth.
The situation is further complicated as companies acquire new entities and scale operations. Often the amount of data to manage escalates considerably and ends up being mishandled without suitable systems and best practices in financial consolidation in place.
For instance—in the case of mergers and acquisitions—it’s common to see bottlenecks arise due to crucial data being pulled from incompatible systems and manually inputted to a parent system. This sort of process results in data riddled with errors as a result.
Data management is crucial to your company’s success, particularly when it comes to the sensitive financial information required for financial consolidations. Companies simply cannot afford the risk of poor data management. It can lead to significant bottlenecks, stressed accounting teams trying to align various financial reports, and non-compliance with government fines resulting in hefty fines (to name just a few of the ramifications).
Poor data management is possible to fix. Often it will require your company as a whole to look for ways to align various entities and subsidiaries to ensure that financial consolidation is possible. It’s easy to identify where issues with data management arise. To build an effective data management strategy, you will need to audit your current data first, then make sure all new information meets the seven standards of reliable data:
Further reading: 4 ways ERPs simplify financial consolidation for multi companies
Having a well-structured framework for data management for financial consolidations makes it easier to identify and rectify issues early on. To gain better insights, your business needs to have clear workflows outlining how to manage data for each of the five steps in data analysis: data definition, collection, cleaning, analysis, and application. By implementing consistent policies across all entities, your company can avoid much of the confusion that often follows a major shift in intercompany financial management, like a merger or acquisition.
If you’ve realized that you’ll need to revamp your finance department’s entire approach to data management or want to build a customized strategy from scratch, we recommend reading our blog covering ten best practices in data management for finance teams.
Further reading: Financial consolidations for multi-companies (FAQs answered)
Poor data management can cause significant security concerns for companies consolidating financials. Transferring data between various entities and systems can weaken security measures and introduce the risk of data breaches. If you’re interested in learning more about the security issues that multi-companies face—particularly mergers and acquisitions—you should check out our blog on the four common security issues they face.
Companies must be vigilant when consolidating data from various entities, often leaving sensitive information vulnerable to cyber-attacks if data is transferred between multiple databases. With stories of data breaches and their significant penalties making headlines, no company is immune to the risk posed by cyber threats. That’s why businesses must prioritize scalable security tools that offer impenetrable encryption and support secure sharing. Be on the lookout for the following features:
It’s also a good idea to provide security awareness training sessions twice a year to encourage your team to stay vigilant and updating on the latest phishing tactics.
Establishing a culture of compliance within your organization is vital to safeguarding your data. You must not only remain updated on the latest changes to accounting standards like ASC 810 or IFRS 10, but you must also comply with any industry- or region- specific data protection regulations. Consult your risk and security officers about new technologies that feature autonomous data capabilities. While no software can guarantee compliance, automation can greatly improve data accuracy and augment your team’s productivity. Additionally, your policies should complement your technologies to create sustainable workflows.
Your finance team can significantly reduce reporting errors by automating intercompany transaction processes, like matching, reporting, and eliminations. When done manually using spreadsheets, these tasks are time-consuming and lack proper data control, leading to errors that may only surface during the final stages of financial consolidation. Rectifying such errors can be burdensome and may require sifting through a large volume of data to find even a single mistake. Automating these processes saves time and reduces the need for triple-checking data integrity, empowering your team to master intercompany transactions.
Further reading: A comprehensive guide to intercompany reconciliation
A study by Bloomberg found that over 40 percent of respondents expected centralized, cloud-based technologies to be one of the most significant drivers of change in data management. By opting for centralized data management, you accelerate financial consolidations and decision-making processes, aligning all entities in a single database.
However, not all solutions are created equal. To set your team up for success, you need to start researching as soon as possible and have a plan in place for post-merger ERP integration. When investing in new software, you must prioritize the following six essential financial consolidation features:
6 essential features of financial consolidation software:
Binary Stream announced it has partnered with Avalara, a leading provider of tax compliance automation software for businesses of all sizes.
Binary Stream is now part of Avalara’s “Certified for AvaTax” program, which features integrations that perform at the highest level, providing the best possible customer experience. As a result of this partnership, Binary Stream’s customers can now choose Avalara’s AvaTax to deliver sales and use tax calculations within Multi-Entity Management — in real time.
Khaled Nassra, Head of Marketing at Binary Stream, explained the importance of using this partnership to empower more multi-entities to streamline their finances through effective intercompany automation.
“Streamlining intercompany accounting processes has always been at the core of what we do here at Binary Stream, so we’re partnering with Avalara to combine our collective experience and enable multi-entities to automate taxes and intercompany transactions from within Dynamics 365 Business Central.”
Marshal Kushniruk, Executive Vice President of Global Partners at Avalara said, “Binary Stream understands the needs of its customers, and Multi-Entity Management reduces complexity for their customers in many ways. We understand that digitization of business processes is not an option, it is essential; we are proud to offer fast, accurate, and easy tax compliance solutions to our shared customers.”
Binary Stream is now an Avalara Certified partner. Certified partners pass a series of criteria developed by Avalara to help ensure the connector’s performance and reliability, thereby helping mutual customers benefit from a seamless experience with Avalara’s tax compliance solutions.
About Avalara, Inc.
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in Brazil, Europe, and India. More information at avalara.com
Intercompany financial management (IFM) refers to the practice of organizing, authorizing, and handling financial processes that occur between a corporation’s legal entities. These activities include intercompany transactions, accounting, tax, policies, etc. The main goal of IFM is to support the achievement of business objectives by improving productivity and accuracy, ensuring compliance with tax and regulatory standards.
As companies grow, smooth and efficient intercompany processes are essential. Unfortunately, a recent survey conducted by Dimensional Research found that 96% of respondents encountered challenges with intercompany activities and 99% agree that intercompany processes are becoming increasingly complex and challenging. Without a solution in place, poor IFM can negatively impact business outcomes, resulting in huge time-wastes manually correcting errors and costly penalties from non-compliance. Continue reading for five tips to streamline your intercompany financial management.
Lack of ownership combined with a perceived lack of importance is one of the key barriers to efficient intercompany financial management. According to Deloitte’s Intercompany Accounting and Process Management Survey, 50% of respondents identified a lack of defined ownership of intercompany processes, resulting in poor financial visibility. Often companies assume that the finance department will handle it; however, intercompany processes are a shared responsibility that require a holistic approach.
Clear communication that establishes roles and manages expectations is vital to overcoming this barrier. Enacting global accounting policies and implementing an intercompany accounting framework are two best practices for intercompany transactions that can provide a consistent structure for your team to follow.
Cash liquidity is a vital component of a business’ survivability and profitability. Maintaining an appropriate balance empowers leadership to acquire necessities, secure new financing, and deploy funding—bolstering expansion initiatives.
The previously mentioned survey by Deloitte also found that 54% of respondents rely on manual intercompany processing and struggle with limited counterparty visibility to support reconciliation and elimination. Without at least partial automation to augment human productivity, companies often suffer from bottlenecks and poor cash flow. That’s why many companies are investing in automation to solve intercompany challenges.
Many businesses choose to pay intercompany charges in lump sum amounts due to difficulties in manually applying the correct classification and breakdown of expenses, but this is a bad habit that must be addressed. Over-simplification can skew your financial data, weakening the credibility of your analyses and making it difficult to defend your intercompany prices to authorities. You also lose clarity when forecasting or determining whether the company met performance targets.
Suitable ERP software with multiple element revenue allocation functionality will help you maintain a well-defined database that enables your finance team to dig into the nitty-gritty. Proper allocations and reporting provide leadership with valuable information and enable complete insight into historical transactions.
Further reading: Financial consolidations for multi-companies (FAQs answered)
Tax risks and considerations have a huge impact on financial performance and strategy. An issue that is only compounded if your company operates in multiple regions or participates in a supply chain that collects sales tax, use tax, and exemption certificates. It’s vital that your company adheres to each jurisdiction’s tax requirements and applies the correct treatments.
In recent years, tax authorities have implemented stricter auditing protocols, demanding more granular and up-to-date intercompany transactions. However, these changes have highlighted a deficit in many businesses with poor IFM. Companies reliant on manual tax processes open themselves to noncompliance and increased financial risk. Automated tax management can help finance teams take back control over their intercompany accounting processes.
IFM entails handling an overwhelming number of intercompany transactions as efficiently as possible. If a business relies on decentralized systems or unintegrated ERPs, inefficiencies arise and trigger reporting setbacks. When finance is bogged down with reconciliations and eliminations, a butterfly effect can be felt across the entire company, ultimately slowing down high-level business decisions.
Investing in integrated and aligned solutions frees up your accounting department to focus on more strategic tasks. Multi-Entity Management embeds directly in Microsoft Dynamics 365 Business Central and Dynamics GP to streamline intercompany transactions, completing the entire process within a single instance.
Intercompany reconciliations can be a major source of stress for accounting teams working with numerous entities. It doesn’t matter if you’re the parent company or the subsidiary. Reconciling a high volume of transactions every month can lead to administrative headaches and bottlenecks that leave your accounting team frustrated and struggling to update systems so that records are accurate across all entities.
Explore everything you need to know about intercompany reconciliations, from defining what they are to walking you through the benefits and challenges; there are helpful tips here for any company struggling to streamline this process.
If you have a specific area of interest, click the relevant question below.
Intercompany reconciliation is the process of verifying transactions between separate entities of the same parent company. These transactions are referred to as intercompany transactions. Reconciliation is a process relevant to many companies. An entity refers to any divisions, subsidiaries, units, or franchises that come under the ownership of a parent company.
Intercompany reconciliation must take place to ensure that consolidated financial statements and data are accurate. It involves confirming that the transaction amount is recorded correctly by both the parent company and the entity and then eliminating it from closing statements.
The three different types of intercompany reconciliation are directly aligned with the three types of intercompany transactions. Below is an example of each one.
Reconciliations do not just apply to the straightforward exchange of products, and it’s essential to understand that they must be performed on all intercompany payables and receivables. These can include the exchange of labour, products, or raw materials.
There are numerous examples of intercompany reconciliations, and depending on the type of transaction, the action required will vary. Let’s look at one of the most common types:
If both the parent company and the subsidiary record these steps appropriately, the transactions will cancel each other out, and they will successfully complete the reconciliation.
Intercompany reconciliations work when there are clear processes around managing transactions and companies have the necessary access to timely and accurate data from other entities.
One of the challenges when handling intercompany transactions is when teams assume they can manage the workload in spreadsheets or separate accounting solutions by manually inputting data. This can lead to cumbersome manual work (e.g., downloading and uploading different files and reports, trying to move information from one accounting system into another, cross-referencing and double-checking for the most recent version of files, struggling to keep up with emails from various entities) and can put both teams under administrative strain.
Reconciliations are best performed in an accounting solution where all entities have access to the data they need in a streamlined, centralized environment. It’s possible to invest in solutions that have advanced security, allowing subsidiaries access to only the information they need while granting parent companies enough access to complete reconciliations and eliminations accurately.
It’s best to perform reconciliations on an ongoing basis, as it can be hard to keep track when teams only check intercompany transactions every month or so. It’s easy for people to forget the details of particular transactions, and it can become increasingly more difficult o resolve errors. If teams have the capacity, this task should be performed on a weekly, if not daily, basis. Many companies invest in an automated solution as the volume of these transactions grows as it can become impossible to keep up.
Even when companies don’t have the means to invest in a centralized solution, they should take the time to roll out global accounting policies to help all entities report in a way that will enable compliance with accounting standards. These policies should include everything from naming conventions to workflow standardization. Setting expectations makes it easier to align data and reconcile transactions between entities.
Without automation, reconciliations can be time-consuming, with few benefits outside of remaining compliant with global accounting practices. However, when reconciliations are automated effectively, the process has many benefits. Here’s a handful:
When intercompany reconciliations are not streamlined or automated, they can present a number of challenges. Here are a few:
There are a number of steps you can take to streamline and automate intercompany reconciliations and ensure your finance team doesn’t struggle to keep up.
Automate, automate, automate | Wherever possible, teams need to eliminate bottlenecks by identifying time-consuming processes and looking to automate and streamline these areas. Investing in a solution built to handle the complexity of intercompany reconciliations will be key to boosting efficiency and improving intercompany reconciliations.
Centralize financial data across entities | A centralized solution can collectively save your entities months of work per year. By giving entities easy access to the information they need, you eliminate the back-and-forth of countless emails. Don’t let reports or records end up stranded on one person’s computer, ensure there’s an environment where anyone can gain secure access to the critical information they need to do their job.
Embrace continuous close | Rather than postponing reconciliations to the end of the month (which can lead to overwhelm), teams should constantly track and reconcile intercompany transactions. Automating this process is possible, so your system continually flags errors, mistakes, or potential fraud.
ASC 810 is a US GAAP accounting standard set by the Financial Accounting Standards Board (FASB), providing guidance for companies with multiple entities to remain compliant when consolidating their financials. It’s similar to IFRS 10, the standard implemented by the International Accounting Standards Board (IASB), but differs in some key areas. Whether your company is merging with another, acquiring a smaller company or expanding into new territories, it’s critical that your team is fully aware of the guidelines set out under this standard.
This blog offers an introduction to ASC 810 to help your team better understand the complexities introduced by the accounting standard and gain insight into how to maintain compliance when preparing consolidated financial statements. If you have more general questions or need a refresher on the topic, check out our complete guide to financial consolidation before you continue reading this blog.
The purpose of consolidated financial statements is to present, primarily for the benefit of the owners and creditors or the parent, the results of operations and the financial position of a parent and all its subsidiaries as if the consolidated group were a single economic entity. There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities. (810-10-10-1).
In the past, determining the parent entity after a merger or acquisition often came down to percentage ownership. In an effort to address the growing number of variations in multi-entity business structures, FASB issued FIN 46R, which introduced the concept of “control exercised through economic power”. This concept means that ownership percentage is secondary to an entity’s ability to influence decision-making and financial results through contractual rights and obligations and risk exposure.
The consolidation evaluation process under ASC 810 incorporates this principle from FIN 46R. Today, companies can determine the parent entity by evaluating ownership percentage as long as the entity in question does not meet the criteria to be considered a “variable interest entity” or VIE.
When evaluating each subsidiary or entity for consolidation, you must familiarize yourself with two key models introduced by ASC 810: the Variable Interest Entity (VIE) Model and the Voting Interest Model (VIM). Under the VIE model, a controlling financial interest in a VIE exists if the reporting entity has both:
Under the VIM, the reporting entity displays a controlling financial interest if it possesses a majority voting interest in another entity. Depending on certain circumstances, like contractual provisions or agreements between shareholders, the power to control may exist even when one entity holds less than 50% voting interest.
To properly determine whether an entity meets the requirements for consolidation under the VIE model or VIM, the following are some of the questions that should be asked about each entity:
Some of the criteria that can help you determine if an entity is a legal entity are as follows:
ASC 805 defines a business as: “An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members or participants.” (805-10-55-3A).
A variable interest is defined as any interest or combination of interests that absorbs an entity’s variability. Although there is no specific list that outlines all variable interests, they are often assets such as receivables, leases, economic benefits, performance obligations, loans, or even an exercisable right to purchase an asset at a fixed rate.
When applying the Variable Interest Entity Model, an entity is likely a VIE if it satisfies the following conditions:
However, the most helpful resource for companies trying to decide whether they should consolidate under ASC 810 is the VIE model decision tree pictured in the image below.
The Voting Interest Model (VIM) is a much simpler model that is familiar to most accounting teams. If a company does not meet the requirements to consolidate under the VIE model, it must look at the VIM. Put simply, this model requires that a company consolidates an entity if it owns the majority of that entity, i.e., over 50%.
Under previous guidance, the general partner would consolidate most limited partnerships. While most limited partnerships were not considered VIEs, in cases where they did qualify, the general partner would often be regarded as the primary beneficiary and be required to consolidate the limited partnership anyways.
With the most recent amendments to ASC 810, general partners must follow the new guidance and likely will no longer need to consolidate limited partnerships. This makes sense as the general partner typically does not truly have control and often acts as a service provider for the other partners. Nevertheless, general partners must provide more extensive disclosures in their financial statements, as most limited partnerships are now considered VIEs under the new guidance (810-10-15-14).
When it comes to compliance for financial consolidation, most companies will face a few challenges. You must invest in software that can appropriately meet the demands of accounting for multiple entities under GAAP regulations. Why not check out Multi-Entity Management, a solution built to help your company simplify processes and streamline financial consolidations.
IFRS 10 is an accounting standard set by the International Accounting Standards Board (IASB), providing guidance for companies with multiple entities to remain compliant when consolidating their financials. It’s similar to ASC 810 (the US GAAP accounting standard for financial consolidation) but differs in some key areas. Although, it’s important to note that both will usually result in the same conclusions.
Companies that need to prepare financial statements under IFRS rules must pay close attention to the guidelines set out under IFRS 10. This blog serves as an aid for your team to understand the complexities introduced by the accounting standard.
If you have more general questions or need a refresher on the topic, check out our complete guide to financial consolidation before you continue reading this blog.
When it comes to IFRS 10, it’s best first to understand the objectives set out under the accounting standard. Put simply, IFRS 10 establishes principles for presenting and preparing consolidated financial statements when an entity controls one or more other entities.
If you’re consolidating financial statements under IFRS 10, then the model is based on an investor’s control of an investee. Control is defined in the IFRS guidelines as follows, “An investor controls an entity when it is exposed, or has rights to variable returns with its involvement with the investee and has the ability to affect those returns through its power over the investee.”
Therefore, to control an entity, the investor must possess all three of the following elements:
When a company is trying to identify which entities have control, they should consider each entity’s rights. Power usually arises from an entity’s rights, such as voting rights, the right to appoint key personnel, the right to decisions within a management contract, and removal rights.
An investor without a majority of voting rights may still possess sufficient substantive rights that grant it power (i.e. de facto power). While substantive rights relate to the practical ability to direct relevant activities, protective rights relate to fundamental changes to the activities of the entity or apply in exceptional circumstances. It’s important to note that protective rights do not result in power or control.
When determining if an investor’s voting rights are adequate to grant it power over an entity, leadership must consider the effect of the voting rights on the power continuum. If the decision is not clear, they must also take into account the following facts and circumstances outlined in IFRS 10:
Often an investor has greater incentive to obtain rights that reward power over an entity as it handles increased exposure to variable returns resulting from its involvement with that entity. Returns are not necessarily positive and can be negative, or a mix of both positive and negative. Some examples of returns include remuneration, cost savings, scarce products, proprietary knowledge, dividends, etc. Crucially, the magnitude of the returns does not factor into whether the investor holds power.
Key to determining if an investor has control is whether there is a link between power over an investee and returns. An investor that cannot benefit from its power over an entity does not have control. Likewise, an investor does not have control if it cannot use its power to direct activities that significantly impact the entity’s returns.
When leadership determines that an entity does not have control, the requirements of IFRS 11 and IAS 28 must then be considered to examine whether an investor has joint control, significant influence, or no governance over an entity.
The following decision tree allows you to assess if IFRS 10 is the accounting standard that best suits your needs.
According to IFRS 10, a parent company is exempt from presenting consolidated financial statements if it meets all the following conditions:
Disclosures are not specified in IFRS 10; however, the required disclosures can be found in IFRS 12 ‘Disclosure of Interests in Other Entities’. The accounting standard states that “a reporting entity should disclose significant judgements and assumptions made in determining whether it controls, jointly controls, significantly influences or has interests in other entities.”
We recommend reading the IFRS 10 guidelines in full. Here is a summary of just some of the critical areas the guidelines cover:
When it comes to compliance for financial consolidation, most companies will face a few challenges. You must invest in software that can appropriately meet the demands of accounting for multiple entities under IFRS regulations. Why not check out Multi-Entity Management, a solution built to help your company simplify processes and streamline financial consolidations.
An intercompany transaction is when a sale occurs between two divisions, units, or entities within the same organization. There are many instances where modern companies must make these types of transactions. For example, a parent company might loan money to one of its subsidiaries or a department might transfer inventory to another unit.
At this point you may be wondering, how do you account for these types of transactions? This blog will answer some of the most commonly asked questions about intercompany accounting.
Interested in a specific aspect of intercompany accounting? Click on the question below to skip ahead.
Intercompany accounting comprises all financial and commercial transactions documented between separate legal entities belonging to the same parent company. These types of transactions may occur between:
An intercompany journal entry is a financial record in the accounting ledger that specifically relates to intercompany transactions. Anytime a transaction occurs between two related entities, the exchange must be recorded and reconciled. A few examples of intercompany journal entries include:
Intercompany journal entries enable companies to meet the same standards of detailed accounting that are expected of all other financial activities. A transaction may only impact a business’ profit and loss statement when it involves an independent, external entity.
Since the entities involved in an intercompany transaction are related, they are not independent, and therefore it would be wrong for the parent company to record a profit or loss. However, by reviewing intercompany journal entries, companies can evaluate the full monetary value of their collective transactions and cultivate a nuanced understanding of their overall financial health.
Accurate financial records of intercompany transactions are vital to strict adherence to regulatory compliance. Accounting principles like ASC 810 and IFRS 10 provide the requirements for preparation and presentation of consolidated financial statements.
Intercompany accounting has become a staple of everyday business, increasingly companies must develop protocols to mitigate the risk posed by handling high volumes of transactions between related entities. The five core intercompany accounting challenges multi-entities face include:
To reduce the complications introduced by intercompany accounting, companies of all sizes must adopt rigorous policies and implement robust processes. Without a proper financial backbone, companies risk non-compliance and hours of lost time as their systems buckle from expansion. Below lists five intercompany accounting best practices all multi-companies can take advantage of:
A downstream transaction occurs when the parent company sells to its subsidiary. In this case, the parent company is responsible for recording the transaction and any profit or loss. The transaction is not transparent to the subsidiaries, only the parent company and its stakeholders.
An upstream transaction occurs when a subsidiary sells to its parent company. In this type of transaction, the subsidiary is responsible for record-keeping and documenting any profit or loss. Not only is the transaction visible to minority and majority interest stakeholders, but they can also share the profit or loss because they share ownership of the subsidiary.
A lateral transaction occurs when two subsidiaries belonging to the same parent company sell to each other. Similar to an upstream transaction, either or both subsidiaries may record the transaction and applicable profit or loss.
The intercompany eliminations process involves deleting transactions made between related entities from the financial statements. This process is essential to mitigate the effects of intercompany transactions on the bottom line and present clear, consolidated financial statements that explicitly show third party transactions.
Further reading: The complete guide to financial consolidation
Transactions involving sales or interest payments between affiliated companies are referred to as intercompany revenues and expenses. These transactions are disregarded by the accounting team because a business cannot record sales of goods to itself as revenue, and the company’s consolidated net assets are unaffected by the removal of linked revenue, cost of goods sold, and profits.
When intercompany stock ownership is eliminated, the assets and stakeholders’ equity accounts for the parent company’s ownership of the subsidiaries are eliminated. The accounting team must create an intercompany elimination to take the profit out of retained earnings.
Intercompany debt is eliminated when a parent firm lends money to a subsidiary, and each party has a note payable and a note receivable. The loan is reduced to a simple cash exchange when the two companies are consolidated; therefore, the accounting team must cancel both the payment and the receivable.
Determining how to manage your intercompany transactions and maintain accurate multi-entity financial records can be a daunting task, but it’s well worth it to develop efficient and effective reporting protocols so that leadership can make data-driven decisions that maximize your company’s resources.
Implement the following eight best practices to streamline financial consolidation and master intercompany accounting:
A robust financial management solution, like Multi-Entity Management (MEM), provides a secure, centralized environment for intercompany accounting and empowers your company to gain better insights with real-time consolidated reporting. Directly embedded in Dynamics GP and Dynamics 365 Business Central, complete your intercompany transactions from end to end within a single database or instance while protecting your data with a scalable security setup customized to your organizational structure.
Recent years have seen a rise in the number of transactions taking place between related companies. Intercompany accounting has become a fact of everyday business, yet, despite this, many remain unaware of the best practices for managing intercompany transaction challenges or have a plan in place to mitigate the risks that can arise when handling high volumes of transactions between related organizations.
If you’re new to intercompany accounting, then take a moment before we jump into the challenges of handling intercompany transactions and check out this short primer on the FAQs. If you’re already up to speed, then let’s jump straight into the core issues multi-companies are trying to overcome through automation.
Handling intercompany accounting involves tracking, settling, eliminating, and reconciling all intercompany transactions between entities. It involves numerous steps, transaction types, and scenarios that need to be worked through for parent companies to produce an accurate consolidated financial statement.
As companies grow and these transactions increase, finance faces an immense backlog of unprocessed data, improvising manual processes to try and meet deadlines, and error-riddled reports that are effectively useless. All these issues can exist as well as the problem of having the entire team tackling the task of trying to fix them, leaving little time for the many other duties on the average finance department’s plate.
If everyone is busy inputting data manually, rectifying errors and scrambling to get month-ends complete, what happens to the strategic elements of finance? How can your team grow operations if you are already struggling to keep up with the pace of intercompany transactions?
A lack of documentation may not seem like the most pressing concern if you currently face a bottleneck of intercompany transactions. However, every minute spent defining processes and standardizing the approach to intercompany accounting will save you hours in the long run.
Often, parent companies adjust for all subsidiaries to produce a consolidated financial statement. Yet, there’s no reason individual subsidiaries can’t complete the bulk of this work with the proper guidance. One problem that regularly occurs is different approaches from different teams and little communication from the parent company regarding accounting expectations.
When acquiring new branches or expanding, companies need to sit down and consider every stage of the intercompany process. Building out policies for handling every transaction type, ensuring teams have adequate tools, establishing a global chart of accounts, and communicating changes to existing policies through continuous training and documentation.
Accurate reporting already costs intercompany accounting teams a lot of time and energy without the additional stress of dealing with errors. Most companies will likely spend most of their time researching discrepancies between reports and rectifying errors on month-ends. Often transactions queried at the end of a month will be weeks old, and parent companies may have to go through multiple departments in a subsidiary to get answers as to what went wrong.
Rectifying errors can cost teams more time than it should take to process an intercompany transaction end-to-end. Wasting time in this manner can impact team productivity and morale, as strategy takes a backseat, and accountants figure out inconsistencies across multiple reports and teams.
The biggest roadblock for accounting professionals is the lack of good tools to handle intercompany transactions challenges. Deloitte polled 4,217 accountants facing intercompany hurdles and found that the most common challenge was decentralized accounting systems.
Far too many multi-entity companies operate from disparate accounting systems, with teams handling finance in silos, importing, and exporting reports, and updating records manually. This scenario is an administrative nightmare and a recipe for financial disaster. It
is worth noting that transferring sensitive financial information in this way is a process vulnerable to security breaches and data manipulation. In the worst cases, it can lead to issues with filing taxes, the loss of essential documents, and reporting that fails to meet compliance requirements.
Finance needs to convince leadership teams of the cost of non-compliance and alert them to the amount of time and money commonly saved by investing in the right tools. Financial transformation often doesn’t begin until it’s long overdue, and when it comes to multi-companies, it should be a top priority before problems start to arise.
Non-compliance is a risk most multi-companies should not be willing to take, yet it’s a risk that many take every day when they postpone financial transformation. Global accounting standards like IFRS 10 and ASC 810 are non-negotiable, and teams must work to keep intercompany transactions in line with the expectations in these guidelines.
Often companies have developed high-level strategies to tackle compliance issues, but the real work happens at the line-item level. Creating smooth workflows involves implementing global policies and frameworks that meet the growing demands of governing bodies.
Although several solutions exist for each issue, automation is at the heart of each. Postponing the inevitable and trying to manually address the rising tide of intercompany transactions in your company will only lead to stressed teams without the tools to properly manage the issues.
Suitable ERPs will allow your team to manage end-to-end intercompany processes without headaches so that you can focus on growing operations through strategic initiatives. If you’re in the market for multi-entity management software, check out this blog on the features to look for in financial consolidation ERPs.
Intercompany transactions often result in cumbersome workloads for accounting teams. This statement is as true for smaller organizations as for global corporations. The best practices presented below are essential for companies of all sizes and help teams reduce the complications of intercompany transactions across any number of entities.
Finance teams must be mindful of intercompany accounting policies and implement the robust processes needed to manage these transactions as complexity increases and organizations grow. Those that fail to prioritize intercompany accounting run the risk of non-compliance and hours of time lost to time-consuming manual processes. Companies can utilize the practices below to solve the everyday challenges of intercompany accounting for financial consolidation.
Not sure if this article is for you. Here’s what you’ll learn to do:
Further reading: Your FAQs about intercompany accounting for multi-entities answered
Getting multiple companies to coordinate their reporting and intercompany transactions can be quite the headache. One of the best ways to get all entities on the same page is to choose an established framework. Frameworks should allow you to break down the end-to-end process while providing a vision for teams to understand new policies and where their efforts fit into the bigger picture. It also assists teams in drafting global accounting
This framework is an excellent place to start your intercompany accounting journey as it breaks down the approach into seven critical components. Below the image, we’ve quickly defined each area for consideration.
Intercompany accounting practices start with effective global policies governing data management, accounts charts, transfer pricing, and revenue allocation.
Finance works to develop appropriate arm’s length pricing and introduce global pricing policies across all subsidiaries that provide transaction-level pricing and reporting guidance.
Categorize intercompany transactions by type. Then develop specific workflows and procedures to streamline and simplify processing for each category and normalize reporting. These steps enable consistency, as well as effective dispute resolution between entities.
Developing a centre of excellence for data management and governance requirements is a critical component of intercompany accounting. Common charts of accounts and clearly defined reporting requirements are crucial to meeting global data management accounting regulations.
Companies who want to streamline this time-consuming element of intercompany accounting must consider the introduction of automated workflows and a centralized accounting environment that can handle multiple entities. Without this step, companies will find managing this will burn through resources, squandering valuable talent as teams struggle to balance statements and produce accurate financial information.
Companies need a defined cash management strategy and a multilateral settlement. It’s wise to determine policies for settlements requiring a cash transaction rather than an account entry. It’s also important to outline when to clear originating transactions son local ledgers.
The consolidated financial statement presents the biggest challenge of intercompany accounting for parent companies and even for child companies trying to satisfy the requirements of their parent organization. Collecting consistent records across all entities can be daunting, and those that excel in this area generally have all the other components in place. Leaders tend to have a centralized intercompany accounting environment with minimal manual input from various entities.
Deloitte refers to intercompany accounting as “the mess under the bed, ” a mess which involves serious risk for those who fail to clean up their processes. Regardless of the size of your enterprise, intercompany transactions increase with complexity as you grow. Whether dealing with two entities in the same city or twenty spread worldwide, you must be mindful of the guidelines governing your transactions between entities.
The challenges of intercompany transactions include everything from managing different currencies and exchange rates to varying compliance standards. To meet the financial requirements of global governing bodies, your organization needs to establish policies that account for these variations across all entities.
The problem is that most companies believe they’ve already taken this step. Most can present several pages of high-level policies that cover intercompany accounting. However, these policies often fail to provide the level of detail needed to ensure smooth intercompany transactions. This level of detail is essential for proving compliance with global accounting standards like IFRS 10 and ASC 810.
Having standardized global policies that include intercompany transactions in their scope is only the first step. As anyone can tell you, the best-laid plans are rarely enough to achieve the desired results. Implement policies in a controlled, centralized environment that reduces the likelihood of human error.
These policies are often rigorous and challenging to implement across various entities. It’s best to consider the value added by a centralized ERP system, allowing you to create standardized charts of accounts that ensure consistency across all transactions and accounting.
Invariably, using appropriate software saves teams from spending many hours figuring out intercompany transactions and making adjustments in consolidated reports. It also helps with creating standard processes and calculations, which makes accounting for month-ends more efficient.
For more on the features to look for in financial consolidation software, check out this blog.
Ask any team that deals with multiple entities where they sink the most time, and you’ll find that eliminations and reconciliations for intercompany transactions will be pretty high on the list. Reconciling transactions across various systems can be an administrative nightmare that can take days (if not weeks) to solve each month.
Plenty of software solutions automate this process by matching transactions between entities. These systems should be capable of identifying different types, automatically identifying and accounting for each in month-end reporting. This frees up time to deal with issues as they arise, allowing your team to allocate resources to only investigate the most complicated intercompany transactions rather than every single one.
Accounting for intercompany transactions is one of the most time-consuming and cumbersome tasks that accounting teams face at the end of a period. Most companies require this task either monthly or quarterly, leading to hectic period ends, with all-hands-on-deck scrambling to consolidate financials from each entity into one comprehensive financial statement.
The problem is that teams are querying intercompany transactions that may have occurred four weeks ago. In most companies, a lot happens in a month, and the older a transaction is, the more time-consuming it can be to query.
The best practice is to introduce continuous close accounting practices that turn your usual period-end closing tasks into daily activities throughout the month or quarter. This allows your team to match, reconcile, and eliminate transactions on an ongoing basis, spreading the workload across the period and removing the need to scramble to account for all intercompany transactions at month-end.
Understanding the most common financial consolidation challenges will give you the power to avoid them. Start by asking yourself these questions:
As these questions make evident, financial consolidation feeds into many aspects of your company’s growth. It allows investors to assess the opportunities and gives stakeholders, regulators and auditors a clear understanding of your company’s finances.
Effective financial consolidation is a rigorous process requiring accurate data, expert project management across all entities, and compliance with accounting regulations.
As you scale, consolidation increases in complexity. Despite this, many growing companies still rely on outdated tools and processes. This blog outlines the most common financial consolidation challenges companies face and best practices to avoid them.
Unreliable data is one of the most common hurdles companies face. Inaccuracies can be due to the use of multiple disparate sources. Often information is manually inputted into these sources, which is a cumbersome task that results in human-error.
Consolidating multiple sources and judging the accuracy of the data can become an almost impossible task, sinking resources into a process that may take months to resolve. It can be hard to know how inaccurate data arises and where to correct it. A failure to address this issue will result in companies facing issues across the board, including data entry errors and bottlenecks caused by cross-checking transactions.
One of the most common financial consolidation challenges is failing to automate time-consuming processes. As you’ve seen above, manual data entry eats up time and resources. It can create more problems than it solves. It’s possible to implement an effective consolidation process by investing in automation to reduce errors and free up time and resources.
Many companies make the mistake of using multiple systems without checking if they integrate fully. As you can imagine, this results in a headache for those responsible for consolidating all this information into one system. It’s not uncommon for each branch of a company to use a different reporting tool, which is problematic.
You need to invest in a single ERP system that creates a chart of accounts adhered to by all entities. For best results, look for one that integrates with your current tools and processes. It’s also wise to consider those specifically built for your industry. For example, hospitals should look for solutions that focus on healthcare materials management. Similarly, SaaS companies may want solutions designed to handle the complexities of subscription billing models.
Another of the most common financial consolidation challenges arises when companies try to record and make adjustments for intercompany transactions. These transactions happen between entities of the same company and include three categories.
You need to adjust for these transactions to give a fair view of the group’s financial health. Making these adjustments can be a time-consuming process that leads to significant delays in the close cycle.
Reporting guidelines, statutory requirements and compliance regulations are continually evolving. As a company scales, it can be challenging to keep on top of all the changes to best practices. Compliance is an ongoing hurdle for most companies, one that is integral to financial reporting and consolidation. Look for an ERP system built to handle compliance as you scale.
One of the most significant issues with using spreadsheets for financial consolidation is security. It’s much easier to manipulate and change data. If it does occur, it is hard to track the source of fraud or data manipulation. One of the easiest ways to circumnavigate this challenge is to invest in software that makes security a priority, allowing you to control access and automate data input—making financial statements much harder to manipulate.
Accounting standards vary from country to country, as do currencies. Each entity must compile a financial statement that meets the reporting standards of its country. These different reporting standards can make consolidation difficult, as you will need to remediate this information in the parent company’s consolidated financial statement.
Currencies and exchange rates are sometimes converted manually and imported to systems, but this is an error-prone process. The only way to accurately handle financial consolidation across multiple countries is to invest in a system built to handle the complexities of different accounting standards and currencies.
