Intercompany transactions & resultant eliminations JE’s are a key adjustment to the group consolidated financial statements and is one of the most time consuming task of the consolidation process. Getting this right involves coordinating with multiple team members and mediating and resolving issues to ensure accounting is correct.
Most groups assume if a reconciliation tool is implemented the problems of Intercompany will be sorted and are surprised when the same issues recur
Why does this happen, to understand this we need to understand what happens during the consolidation process
1) Usually subsidiary companies are expected to submit an audited group within 15-30 days from the period end to the holding company and this group pack will typically include details of intercompany transactions
2) Intercompany reconciliations are rarely part of the monthly close process of subsidiaries and usually the intercompany reconciliation process is triggered on a quarterly basis/ annual basis depending on the reporting cycle of the ultimate parent
3) The corporate controller/ head of consolidation or his team would be trying to figure out differences between say Subsidiary A & Subsidiary C submission and it would effectively become his responsibility to mediate between A & C and figure out the differences.
4) In most cases closer to the reporting deadline, a decision would be made to compromise. Usually the company which is selling is considered to be providing correct information and the buyer will be forced to record a goods in transit entry (in case of a purchase) which would be reversed once the reporting is complete
5) Now the real issue is unless the transaction level reconciliation is completed the Goods in transit will start ageing. It’s not unusual to see Intercompany sale invoices recorded as goods in transit going back a couple of years which is when the group realizes the process is completely broken. This can potentially become an audit issue as small differences can balloon into a material adjustment.
6) Finally when we get down to detail and try and understand who is accountable for this problem and request for details from the subsidiary accounting team, they would usually push back to state that the entry was posted on the advice of the corporate consolidation team and finally the team responsible for the issue would never be fixed and this ultimately will result in non collection of receivables in the subsidiary books also
7) Because intercompany receivables are low risk they will slip under the radar of the group and even the subsidiary auditors and the vicious cycle will start again
Reconciliations tools are only helpful in my view if the group has implemented a process of intercompany reconciliations as part of the monthly close. In groups where subsidiaries operate in different geographical locations with a fair degree of autonomy over daily operations this will take significant effort to implement. At a minimum there should be a process during financial reporting to hold subsidiary teams accountable for intercompany differences and ensure differences are highlighted to the respective entity controllers on a real time basis. In my view for an acquisitive group whilst a reconciliation tool does add value, a workflow which establishes accountability and forces group companies to communicate and resolve inter company differences on a timely basis is more critical. Intercompany differences have to be owned by transacting entities and differences should not become the problem of the corporate controllership.
We at FINAHQ understand these problems and our intercompany reconciliation & workflow provides real time notifications of intercompany differences to subsidiary controllers enabling better coordination across teams and reduces efforts/ stress on the corporate consolidation team.