Guest Article by Pheona Bowser
Certified Scrum Product Owner | Global Transformation Leader | ERP Implementation | Continuous Improvement | Intercompany Process Owner, Nashville, Tennessee

As companies increase their market presence through acquisitions, and their international footprint expands, the complexities of Intercompany will rise exponentially.

Local regulatory requirements, scrutiny of multinational operations, disparate systems, and the lack of prioritization toward a matured Intercompany ecosystem are some of the key drivers of Intercompany complications.

The Commonality

Record to Report, is the accounting operation that manages Intercompany Accounting transactions. Early in my career, I recall shared anxiety with my colleagues because of month-end processes. As workday one approached, we, accountants, anticipated the stress of working long hours, and the pressure of quickly resolving issues to reach month-end close benchmarks. The loudest challenges during month-end for an Intercompany Accountant is ascertaining the out of balances and determining the party responsible for posting “the plug”.

The Plug is an adjusting entry that balances the difference between accounts receivable and accounts payable, respectively. This adjustment usually impacts two balance sheet accounts.

One should conclude that the balance sheet will result in being overvalued or undervalued depending on the direction of “the plug”. The profit and loss statement will suffer the same consequence, merely because of “the plug”.  Because this entry is between two balance sheet accounts, the P&L will not be accurate. For example, in a use case where services were rendered, if the selling entity shows an accounts receivable, it will also reflect the respective revenue. Equally, the purchasing entity should reflect an accounts payable, with the respective P&L expense. Experienced accountants and leaders know that Intercompany transactions should be eliminated, causing no impact to the consolidated financial statements. Yet, month after month, these out of balances can be astronomical, either between a parent entity and its subsidiaries or between subsidiaries, causing downstream implications and complexities to the consolidation process, and inaccuracies to the financial statements.

Intercompany elimination bottlenecks are often caused by the lack of end-to-end processes for Intercompany transactions, hence, the month-end chaos. Traditionally, Intercompany Accounting month-end deliverables include:

  • Goods In Transit Calculation – A calculation that accounts for inventory adjustment with an offsetting impact to AP/AR depending on passage of title rules
  • Accruals – A method to record revenue and expenses when they are incurred in the absence of cash exchange
  • Leading Indicators – Preventive measure to avoid material out of balances, Trend analysis to identify huge P&L swings that can drive accruals
  • The Plug – An adjusting entry that balances the difference between accounts receivable and accounts payable, respectively. This adjustment usually impacts two balance sheet accounts.

The Experiment

How does “funny money” become a real liability to a company? Due to permanent establishment risk, companies can be exposed to material consequences due to double taxation, audit findings, and penalties, because of poor accounting practices.

Companies should defame the culture of Intercompany being an afterthought, and the notion of it only being “funny money”.  Instead, commit to an Intercompany ecosystem that includes:

  • Strategies that treat Intercompany transactions with the same rigor and prioritization as third-party transactions
  • The voice of accountants should be heard, organizations should prioritize the overall health and well-being of accountants to ensure morale stays high
  •  Invest in systematic solutions to alleviate the complexities of Intercompany transactions

These actions can ultimately prevent unnecessary stress and anxiety. It is vital for companies to ramp up their strategies by choosing a solution partner with the mechanism to manage and handle the complexities of Intercompany by being the bridge to a true Intercompany ecosystem.

The Solution

Today, I am ten years removed from the record to report operations. I am excited when I investigate the market and see companies are finally starting to pay attention. By constructing lean principles, companies are becoming more proactive with managing Intercompany problems.

As lean and continuous improvement strategies are introduced to Center of Excellence operating models, simple problem-solving methodologies should be implemented to ensure countermeasures are put in place to sustain the solutions.

However rudimentary, once the root cause of Intercompany problems are identified and understood, accountants and leaders should connect to the upstream narratives that drive downstream complexities.  The problems are persistent and cyclical, due to the lack of a true Intercompany ecosystem and framework that promotes cohesiveness and continuity. A few ideas to consider as you build a matured ecosystem for Intercompany should include the functional areas of Tax, Finance and Accounting, Treasury, and Legal.

  • Governance – Standard Intercompany policies and procedures are clearly defined with accountability and ownership
  • Data Management – Common record model that illustrates a standard schema and data definition to promote visibility and transparency
  • Transactional Management – A process matrix that demonstrates the maturity levels of the current state along with, the target state end-to-end processes
  • Reconciliation and Elimination – A leading indicator to ensure all Intercompany transactions are effectively eliminated
  • Reporting – Internal and external reporting

I’ve had the pleasure of working with Tartan Solutions’ PlaidCloud. PlaidCloud is a viable solution in the market that can remedy the downstream complexities of Intercompany and Transfer pricing rules. The uniqueness of this software is it’s a one stop shop. This solution handles true end-to-end processes for Intercompany and can handle the Data Management, Transactional Management, Reconciliation and Elimination as well as reporting.

  • PlaidCloud facilitates Transactional Management by handling the Intercompany billing such as:
    • SG&A Recharge Programs with an allocation calculation basis for Marketing, ITS, Supply Chain, Tax, Global Services, etc.
    • Mark-up provisions to calculations (Pass-through, routine, value-add, strategic add)
    • Tax Calculation (VAT, WHT, GST)
    • Itemized invoice creation
    • Email notification with invoice attachment for subsidiaries that manages their journal entries manually
    • Unifies multiple ERP and accounting systems across entities and posts balanced entries in all systems by design
  • PlaidCloud can be used as a repository for contracts and invoices to facilitate billing recharge program rules
  • PlaidCloud eliminates the need for a robust reconciliation and elimination process because both sides (between companies) of the Journal Entry postings are automatically booked.
  • PlaidCloud offers reporting and enhanced visualization by providing:
    • Traceability and visibility from the origination of cost, to its final resting place
    • Country to Country Reporting
    • Segmented P&L

Let’s do it! Invest in your Intercompany processes and join us, the forces, that believe in a healthy Intercompany ecosystem, and utilize PlaidCloud as your solution partner. Contact PlaidCloud to learn more, Request A Demo, or call the team at 408-827-8262 to get started,