Intercompany reconciliation of a group of corporations can act as a source of worry for accountants everywhere. It stands among the top aspects that accounting professionals spend considerable time for the yeare-end finalization process.
Even the stats showcase the same fact. As per a BPM international survey, 72 percent of corporate ventures have to devote a large chunk of time to resolve intercompany transaction differences.
Undeniably, we need to understand how to smoothen the intercompany reconciliation (ICR) process. So, team Unison Globus is here to assist you in this endeavor.
What is Intercompany Reconciliation (ICR with example)?
Intercompany reconciliation refers to reconciling figures between two successive branches or legal entities under the same parent institute after a transaction. So, let us take the example of Facebook, which has two subsidiaries Instagram and Whatsapp.
One branch acts as a vendor, while the other acts as a purchaser. It means that under the same corporate roof, one legal entity pays the other.
You can bifurcate the ICR transactions into three categories:
1) Transaction in the Downstream: The transfer of ownership from the parent to the subsidiary.
2) Upstream Transaction: In an Upstream transaction, the transfer of ownership from a subsidiary to its parent corporation.
3) Transaction on the Side: A lateral transaction occurs when a parent business has two subsidiaries.
Why is ICR necessary, and how can it benefit you?
With a rise in the number of its subsidiaries, the intercompany reconciliation of its trading balances has become a formidable problem. Also, if the number of subsidiaries is small, spreadsheet tools can be used to manage them manually.
Large multi-subsidiary firms must reconcile and settle inter-company balances on a daily or weekly basis to meet obligations such as:
- Monetary constraints and regulatory reporting, Liquidity report,
- Currency management and optimization, Cash planning, and treasury operations
- Improve the efficiency of your resources and procedures.
- Recognize and evaluate the various sorts of transactions and parties engaged within your group firm.
The reconciliation procedure is used to guarantee that master ledgers of subsidiaries and various bank accounts match up.
It entails deleting the inter-company transactions that will no longer be a component of financial statements. Externally filed transactions should not be included in the reports.
The intercompany reconciliation transaction can benefit a multi-subsidiary company in a number of ways.
- At month’s end, every subsidiary AND corporate accounting saves a significant amount of time and money.
- At year’s end, auditors will spend less time reconciling ICs.
- Subsidiaries can focus their time and effort on resolving data mismatch concerns rather than on data gathering.
- The ability to store all Accounts Payable (AR) and Accounts Receivable (AP) items, combined with reporting capabilities, provides auditors and management with an invaluable view of the entire intercompany position and its evolution.
How does Intercompany Reconciliation work?
Intercompany reconciliation involves any one of three ways:
G/L Open Items Reconciliation (Procedure 001): If the account receivable and payables get posted to the G/L accounts, this process reconciles open items (items that remain open on the Open Item after the posting process).
G/L Account Reconciliation (Procedure 002): This procedure gets used to reconcile records on accounts that do not have open time management, such as profit and loss accounts.
Open Items Reconciliation (Procedure 003): This process is used to reconcile open things (items that must be reconciled manually) and can be utilized for most account receivables or payables associated with customers/vendors’ accounts.
What are the challenges and problems with Intercompany Reconciliation?
The issue is that an invoice recorded in one subsidiary’s Accounts Receivable (AR) is frequently not recorded in the payer’s Accounts Payable (AP) on time, correctly, or at all. It results in significant discrepancies, which generate issues in the consolidated accounting.
1) Accounts Payable mismatches due to delays or improper booking (AP)
2) It’s unclear who should be contacted to resolve disputes.
3) One needs manual adjustments for the consolidated balance sheet.
4) There are inaccuracies in the drafting of the P&L account.
5) At the end of the month, there is a lot of time pressure.
6) Every subsidiary and the corporate level use manual processes.
7) Corporates don’t store frequently reconciled data and paperwork centrally.
How to carry out Intercompany reconciliation?
Intercompany reconciliation is essential for more effective and timely financial reporting and analysis. Below are four critical actions that one should fulfill in order to function their IC reconciliation processes properly.
Step 1: Create a set of trade rules that are consistent.
Companies are spending a substantial period of time deciding on a diverse variety of reporting practices. If the corporation categorizes and tags its transactions one way and the subsidiaries do it another, your accounting teams shall have to face yet another data jumble.
Thus, we eliminate the need for counterparties to book and correct intercompany transactions by formalizing well-defined governance and policies and then automating the established norms.
Step 2: Bringing data from various sources altogether
Using financial software that works with many data types eliminates the need to transform data into a specific format before importing it.
With live integration and comprehensive matching capabilities, you can rest assured that your intercompany reconciliations are thorough, accurate, and completed on time.
Step 3: A well-defined process
A company that follows standard workflow, and executes all intercompany reconciliations in a precise sequence eases the process.
Businesses can handle conflicts using permitting process, supervision, and administration of settlement all the way through to rectification, including routing to the appropriate employees to determine which legal entity is liable, thanks to workflow and controls.
How to improve Intercompany reconciliation?
Intercompany reconciliation becomes a severe issue in terms of efficiency, resource, accuracy, and risk management as the number of organizations and subsidiaries grows.
Many factors contribute to the lack of data accountability and make the procedure unpleasant.
Here are three methods to make your intercompany reconciliation better for all of your teams.
1) Create a specific approach for deciding on a transaction as a group before one organization submits an invoice to another.
2) An organization must have a process for dealing with and resolving conflicts between intercompany trade agreements.
3) Developing a workflow and approval procedure to address disputes will significantly decrease the constraint in reconciling intercompany finances.
4) Setting up a calendar to receive any confirmations or disputes and closing them by a specific date during the month will help the organization perform effectively.
What are the tools you need for Intercompany reconciliation?
When you’re searching for an intercompany reconciliation solution, here’s a list of things to check for, depending on your requirements:
1) Account structure mapping capability
2) You can map intercompany trading partners.
3) Ability to create auto-posting rules
4) Extensibility
5) Flexibility and adaptability
6) Customer Care
7) Consultation and recovery
Accounting for intercompany reconciliation and resolution is not difficult. Though, building an accurate, cost-effective, and controllable solution across multiple subsidiaries has proven to be a challenge for giant firms.
Establishing uniform corporate guidelines, merging data from multiple sources, specifying a straightforward procedure, and increasing visibility may all aid in the development of a more robust intercompany reconciliation transaction process. Besides, that process is flexible, adaptable, and expandable to your needs.
Manage your periodic reconciliation of intercompany transactions more expediently with better expertise!
Hire Unison Globus for unbeatable outsourced accounting and bookkeeping assistance!
CPAs can often find dealing with affairs like ICR a true challenge. Team Unison can enable you to tackle the hassles effectively. Contact us to know more now!