What is an intercompany reconciliation?
January 22, 2015
Normal business relationships among a parent and subsidiaries cause intercompany transactions that need to be recognized in the separate financial statements of these entities. When the time comes for periodic reporting, the parties engage in reconciling their accounts. In this article we will review the reasons why intercompany reconciliations are needed and look at reconciliation procedures.
Firstly, intercompany transactions artificially increase assets, liabilities, income and expenses of companies within a group.† To ensure true representation of the consolidated financial position and performance of the group, intercompany transactions and balances should be properly eliminated in the groupís financial statements.
Secondly, efficient reconciliation enables the group to minimize bank transactions fee, optimize liquidity, and reduce financial and currency costs as well as risks. For example, a multinational corporation with a range of subsidiaries oversees may use a central treasury for gathering information on provided intercompany loans and debts of individual entities. The treasury center may subsequently settle those obligations against each other with only the remaining clearing amounts being physically transferred.
Finally, proper intercompany reconciliations may identify unrecorded transactions or balances on the books of individual entities (or identify incorrectly recorded transactions or balances).
It is often a challenging task to achieve reconciled and balanced intercompany accounts.† Lost invoices, sales recorded in different financial periods (cut-off), cash in transit, invoiced amount discrepancies, exchange rate differences and many other discrepancies may result in reconciling differences in intercompany accounts.
The parent company typically establishes an accounting policy for intercompany reconciliations. The latter may be performed monthly, quarterly, several months before the reporting date (interim) and, finally, at the end of the fiscal year (annually).
Intercompany reconciliations may involve a large number of manual procedures among parties making the process time consuming and increasingly risk prone. Implementation of internal controls enables group companies to reduce the risk of material misstatements in the financial information resulting from intercompany reconciliation issues. Among examples of such internal controls are reviewing posted intercompany transactions by senior specialists, approving of the prepared reconciliation spreadsheets by the financial officers of the individual entities, running automated matching processes in the system regarding debt claims and liabilities, accounts receivable and payable, etc.