3 minute read 23 Feb 2021
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How to drive efficient and future-focused intercompany accounting

By Marva Dryke

Managing Director, Business Consulting, Ernst & Young LLP

Passionate about connecting data and tech to improve the daily lives of F&A teams. Transformative mindset. Evangelist for intelligent automation. Translates business needs into system requirements.

3 minute read 23 Feb 2021

Organizations are fighting through a thicket of clashing policies, processes and technology approaches when handling intercompany transactions.

In brief
  • The intercompany journey covers accounting, tax and treasury across business units and subsidiaries in often complex organizations that span the globe.
  • Solutions such as BlackLine’s Intercompany Hub offer a defined process and workflow with controls in place.

Intercompany transactions expose many fault lines in an organization when technology approaches are siloed and policies and processes are created in isolation. And finance functions are left to try to make sense of the results.

Different ERP systems are misaligned and unintegrated. Timing differences in policies thwart coordination. The buyer and the seller can’t see what’s on each other’s books, and when problems inevitably surface, it can be unclear who needs to be contacted for a resolution. Inefficiencies and delays pile up, triggering costly exposure to foreign-exchange risks and setbacks for when earnings are reported.

Companies should invest in new software not only to drive efficiencies but also to get more out of their finance function. For instance, greater standardization through a holistic solution gives organizations better information for better analytics and forecasting (such as in transfer pricing) to make better decisions — directly impacting the bottom line. And reporting gets much simpler, particularly for indirect taxes such a VAT and GST, with the right entries eliminated for consolidated financial statements.

The right solution covers five key areas to boost your ROI:

Underlying policies and data architecture

These components provide a foundation for your finance/intercompany operating model. Considerations include when you cut off intercompany transactions posting to your general ledger, for example.

Challenges surface when the cutoff time is not synchronized globally. Many companies will cut off accounts receivable (AR) on the day after the workday and then accounts payable (AP) a day later to create synchrony with a bit of flexibility, if different ERP systems are in play.

Also, do you use the functionality in your ERP system to track counterparty? The seller, in intercompany AR, can put the buyer in the counterparty, so each side of the transaction knows whom to talk to if needed.

Initiation of intercompany transactions

If your system is configured effectively, trade flows are automated. Purchase orders come from external or internal companies and customers, leading to a sales order that comes out with the intercompany results.

The non-trade categories are vastly more complex than typical trade: dividends, royalties, commissions, and loans, for example, are manual transactions originating out of a variety of departments.

You can arrange an up-front preapproval within the workflow, for example, so that when an invoice is created and posted on the buyer’s and seller’s books, it can be automatically taken to payment.

Posting of invoices

In an integrated system, trade transactions flow through easily. But with separate ERP systems, AR and AP are handled separately, and non-trade transactions add another dose of complexity.

With Intercompany Hub, the right data is posted to the ledgers of the buyer and seller at the same time even when different ERPs and data structures are used, thanks to the use of templates.

Matching and reconciliations

These can be done at a company-to-company level (by looking at the seller and buyer to see whether they have the same balance) or at the invoice level (by matching the invoice from the seller to what the buyer has).

With BlackLine Intercompany Hub, for example, matching can occur on an invoice-line-item level, which is important for addressing a couple of problems on an invoice — say, the wrong item or quantity — without tossing the whole invoice or manually hunting through Excel spreadsheets.

Dispute resolution and settlement

Generally, a global process owner will bring the seller and buyer together to resolve a dispute if it’s under a certain dollar threshold, or it could be escalated to a committee that meets on a certain timetable (often quarterly).

A settlement can take different forms—for instance, by netting AR and AP against each other and paying the difference or making the payment on every invoice (sometimes mandated). Or, rather than exchanging cash back and forth, a number will be booked into equity. Some companies take the amount, and on an annual basis, they settle it. The right technology can accelerate and document these resolutions.

It is critical for organizations to address operational policies, processes, data, automation and change management for a full transformation from end to end. In this opportunity, more efficient, more accurate and faster reporting is table stakes: companies that approach it holistically can also capitalize on better forecasting and analytics and therefore engage their tax and accounting staff with more fulfilling and important work.

This article originally appeared in BlackLine magazine.

Summary

Finance teams that manage intercompany transactions navigate inconsistent processes, misaligned data, manual reconciliations and disconnected technologies. The right technology solution holistically addresses inefficiencies and risk factors, boosts your ROI, and drives better information for advanced analytics and forecasting.

About this article

By Marva Dryke

Managing Director, Business Consulting, Ernst & Young LLP

Passionate about connecting data and tech to improve the daily lives of F&A teams. Transformative mindset. Evangelist for intelligent automation. Translates business needs into system requirements.