I was excited about seeing the boys after returning home from a business trip. As I entered the house, I noticed shoes strewn about the foyer, blocking a clear pathway into the house. Instead of carefully moving the shoes out of my way, I attempted to step over them. Classically, I tripped and fell. It was a clumsy and unchoreographed fall. I know my stature is short, but I decided to try and step over the shoes anyway, which caused knee issues that prevented me from going on my walks. Ultimately, my routine was disrupted for a few weeks.
Many companies know the volatility of Intercompany and choose to step over the issues. Statistics show that most organizations that do address the Intercompany process are doing so reactively because of consequences from audit findings with actual Balance Sheet and Profit and Loss impacts.
Intercompany, The Aftermath highlights how common missteps from companies can cause real P&L impacts and the importance of creating an Intercompany Ecosystem
Now, Let’s talk about how Companies can reposition processes to prevent the clumsy and unchoreographed falls.
Problems are Golden
Problems are golden because they are opportunities to improve. I would like to explore the treatment of Intercompany as a product. During the discovery phase, take the time to identify the direct cause of the problems by utilizing simple tools such as fishbone, process map, and Pareto. Getting to the cause using the five whys method will begin ideation and countermeasures that will render a benefit hypothesis and an initial point of view on the value proposition.
The critical development stages are discovery, design, build, and deployment.
In the Discovery stage, Points of consideration for Ideation:
First, Master Data is foundational: Systemically, disparate systems contribute significantly to the root cause of Intercompany problems. Inherently, Master data will be a critical factor because it is a way of unifying views of critical business domains and ensures consistent nomenclature exists for users to easily analyze and consume data to ultimately drive better and faster business decisions. To treat Intercompany as a Product during the ideation stage, explore solutions like PlaidCloud, an efficient mechanism for analyzing, structuring, and cleaning data. This software ensures that Information always ends up with perfectly organized data.
| Information Type | Description |
| Cost Basis/pool | Contains all cost centers, accounts, reclass transformations required for determine the Intercompany service cost base |
| Cost Data Type | The cost data type represents the type of data that forms the basis for cost base data |
| Allocation Key | Allocation method for recharging the transaction costs and markup |
| Allocation recipients | Defines the group of legal entity(ies) who is the recipient of charges and include in the allocation calculation |
| Service type | TP classification of the services being performed, based on guidance from the TP policy |
| Mark-up parameter | Amount by which the cost base gets marked up for recharge and is defined based on the service type and guidance in the TP policy |
| Function | Type of Service being offered that provides invoice description and reporting drilldowns |
| Duration and Frequency | How often the recharge will be invoiced that the end date agreed by the parties involved in the transaction. |
For transactional management, most organizations with a global footprint should have an established Intercompany recharge program. Partner with a transfer pricing tax leader on established uniform guidance. Pricing services across international borders between and among related parties, with the intent of being consistent with the “arm’s length” principle.
Intercompany Services in the Future State
- Building an inventory of all Intercompany Services within the organization, such as
- Global Procurement Operations – could procure employee salaries and the cost associated with performing global support regarding procurement policies, negotiations, and services.
- Global Marketing operations – could Market employee salaries and the cost associated with performing global support regarding developing marketing strategies, establishing policies, and providing services.
- Information Technology Services – Technology expenses, including employee salaries, administrative expenses, and subscription and license fees.
- Determining the right allocation key for intercompany services cost charge
- Establish a principal operating model for organizational efficiency and standardization purposes.
- Detail regarding base computation
- Description of mark-up to be applied to services
- Outline the benefit conferred by services
- Description of service provider/recipient
- Detail regarding true-up provision
- Description of the nature of services
The objective is to establish a standard process for setting the price of services that when applied, will result in intercompany transfer prices being calculated on a consistent basis.
PlaidCloud is a viable solution that is truly a one-stop shop for Intercompany processes. It facilitates transactions by handling intercompany billing, which includes the allocation calculation for service recharges, markup provisions, tax calculations (VAT, GST, WHT), and itemized invoice creation. From an accounting perspective, PlaidCloud posts both sides of the journal entries for both related parties (the seller and the buyer). Intercompany elimination is a critical month-end activity to close the balance sheet without top-side adjustments. PlaidCloud also attaches the invoice document to the associated journal entries to substantiate the Intercompany Transaction.
Data Collection for Invoice Requirements
| “Framework for Intercompany Invoices” | PlaidCloud Capabilities |
| Filing of Invoice with authorities | Facilitate based on local regulatory requirements |
| Description of Services to be shown on invoices | Configure cost object rollup functional description for every service type recharge that a recipient receives |
| Separately Identified services (and description) on invoice | Report the cost center rollup function descriptions for every service type recharge that the recipient receives |
| Alignment with service description in Intercompany Agreement | Configure naming convention to align Intercompany Agreement |
| Separate disclosure of cost base, markup, transactional taxes | Calculate and report the cost base per service groupings, calculate markup according to policy and report on invoice separately. Configuration ability to populate and calculate transactional taxes per invoice |
Utilize PlaidCloud as your solution partner, they will be critical to the next phases of your product development (Design and Build). Contact PlaidCloud to learn more, Request A Demo, or call the team at 408-827-8262 to get started.