By Ruth Richter • June 10, 2020

Blog|The High Cost of Ignoring Intercompany Accounting

As a company grows either organically or via acquisitions, their organizational structure gets increasingly complex. One of these complexities comes in the very likely form of its own subsidiaries conducting business among themselves. Because funds are technically moving within the same organization, it’s not considered a valid sale, since the transaction was entirely internal. Thus, these individual entities cannot show profit or loss on the parent company’s balance sheet when the consolidated financial statements are prepared. This elimination is accomplished with intercompany accounting.

In short, it’s incredibly important to get intercompany accounting right.

Intercompany Accounting 101

The simplest way to ensure intercompany accounting is done right is to flag all intercompany transactions in the accounting system at the point of origin. This makes it easier to find these transactions and automatically back them out when the consolidated financial statements are prepared. But if accounting systems don’t have a flagging feature, this has to be accomplished manually, which comes with a high margin for error. Because of its complexity, intercompany accounting has a tendency to be a key bottleneck in the process of month-end close for the parent company.

It’s not just internal pressures. With the rise of complex multinational value chains, there’s even more scrutiny from regulators and auditors, and companies are running into serious and sometimes costly intercompany accounting issues, largely due to insufficient intercompany accounting practices.

Ignoring Intercompany Accounting Won’t Make it Go Away

Perhaps the more distressing issue, however, is not that complexities and manual reporting have caused issues in intercompany accounting so much as the fact that some organizations have turned a blind eye to the practice altogether. They may run by the philosophy that it all “shakes out in the wash.”

Other organizations are facing added complexities from operating in multiple countries, which includes complying with various country-specific regulations and tax policies. As still others grow, they establish a centralized business service center, which effectively increases the number of intercompany transactions being processed, sometimes to the point that intercompany transactions outstrip external sales several times over!

Add incompatible financial systems or inconsistent practices across the various entities, and finance teams are left scrambling to uncover errors after the fact, another unsustainable problem that will only compound as time goes on.

Taking the Lead in Intercompany Accounting

The companies that come out in the lead in intercompany accounting are the ones who are taking a preventative stance, creating an intercompany accounting framework that is streamlined and adopted across all entities.

It’s important to collaborate in order to reorganize your intercompany accounting and move forward. Finance cannot function as an island. Even if this team can find and fix all its intercompany accounting issues, if the originating classification is still wrongly assigned, the problem is still there.

There is hope. By casting a single vision for the future, you can start getting everyone to work from the same practices. It starts with a framework that encompasses every part of intercompany accounting. This framework will help your team see intercompany accounting as a connected end-to-end process comprised of manageable steps.

Learn more about establishing a vision and framework for improving your intercompany accounting with Deloitte’s free whitepaper, Putting Intercompany Accounting on the Straight and Narrow.

Sync Accounting Data With IN-SYNCH

Intercompany accounting includes, at its core, proper data communication. That’s where IN-SYNCH® Sage 100 and Sage 100cloud integration by ROI comes in. With this powerful solution, you can automate the intercompany data process with instant, bidirectional, and secure data integration. A complete intercompany accounting transaction can be finished in just one step instead of six. Learn more about Sage 100 intercompany accounting the IN-SYNCH way.

Are you ready to automate your Sage 100 intercompany accounting? Contact an integration specialist now.