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What Is Intercompany Accounting?

Intercompany accounting is a by-product of corporate expansion. It’s what happens when a company grows until it includes multiple legal entities, any number of which may be subsidiaries located in different countries.


Intercompany transactions occur when business units within the same organization trade goods and services with each other. These trades may take place between a parent and subsidiary, two or more subsidiaries, or two or more departments within the same unit. They may take the form of loans or sales of goods or services from one entity to another. It’s like passing money from your right hand to your left — money may have switched hands, but it’s still your money.


Consolidate transactions


The inherent problem here is that a transaction between different legal entities within the same organization does not amount to a valid sale for the parent company. Therefore, it must be eliminated from the parent’s financial statements through the process of consolidation. Failing to do so means the transaction will be recorded twice, which is fraud.


It sounds serious enough, but is it really such a big deal? Absolutely! The sustained drive toward globalization through industry consolidation, mergers, and acquisitions means that intercompany transactions now account for the majority of international trade — some 75% of it.


Manual-processing headaches


Initially, a growing company will handle intercompany accounting with a set of manual processes and standalone spreadsheets. However, as the business grows, the complexity does too because intercompany processes require the cooperation of many areas of the organization, including tax, treasury, accounting, and legal.


To address this, most companies establish high-level policies to guide intercompany decisions, but these often fail to address the technicalities and manual processes involved. Obstacles that prevent efficient consolidation include incompatible software systems used by different legal entities, multiple settlement processes, complex legal and tax agreements, transfer-pricing compliance, and foreign-exchange exposure.


All these and other difficulties lead to delays at every stage, culminating in pressures at the end of each financial period — the precise time when organizations need to close the books of each entity and roll them up to group level for reporting purposes. In short, a set of manual intercompany accounting processes represents a period-close bottleneck. This makes it difficult to deliver timely and accurate financial information, which is essential for making sound business decisions.


The solution


So, what is the solution? In a word, automation. The use of an end-to-end approach can remove the error-prone manual burden and streamline the required accounting processes. Automation can ensure adherence to best practice and offer access to a single source of truth at all times for all stakeholders.


An effective automated system can effortlessly reconcile accounts payable and accounts receivable, even when transactions are pulled from multiple enterprise resource planning (ERP) software systems. It can standardize transaction processing across all legal entities — each with their respective charts of accounts — and accommodate foreign exchange as well as currency conversion into the parent company’s functional currency.


Virtual Trader delivers automation in two flavors: either as a cloud-based ERP-agnostic system or as an extension of Oracle E-Business Suite. Both delivery mechanisms offer extraordinary flexibility by employing a modular, business-rules approach. This allows trading-partner intercompany transactions to be isolated and eliminated while meeting finance, statutory, and tax requirements. The outcome is a tidy, swift period close that frees up organization resources and improves performance.


Let us show you how automation can make your intercompany accounting simple and effective.