As businesses expand to include multiple branches, the accurate handling of intercompany transactions is more critical than ever.
In recent years our CPAs have seen many profitable and well-respected companies having to restate their financials because of errors in intercompany transactions.
Research shows that inter subsidiary transactions contribute substantially to the global economy, which means that accurately accounting for it is vital to the financial well-being of your business. But, what is intercompany accounting?
What is intercompany accounting?
Intercompany accounting is the practice of recording financial transactions occurring among legal entities within the same corporate group. Given the inherent relationships between these entities, intercompany transactions cannot be treated as independent events. This means that companies cannot include the profits or losses from these transactions in their consolidated financial statements, which makes accounting for intercompany transactions tricky.
Navigating transactions between subsidiaries can be challenging as it requires thorough knowledge of regulations when it comes to specific financial exchanges.
Examples of areas in which intercompany accounting typically come into play:
- Centralized cash management functions
- Fee sharing
- Royalties
- The purchase or sale of goods between subsidiaries and their parent company
- Leases between the parent company and subsidiaries
Our CPAs have years of experience in the field and keep regular tabs on regulatory compliance standards. In this article we take a look at some of the challenges that businesses with multiple branches should consider when it comes to accounting, and how to safely navigate these challenges.
Challenges with intercompany accounting
Intercompany accounting can be extremely complex for modern businesses. This is because international trade and mergers bring with it intricate tax regulations. Multi-state taxes can be extremely challenging to navigate for parent companies with subsidiaries operating across multiple states and borders. Adding to this is the complications that come with navigating different currencies, varying policies and a multitude of different systems.
When intercompany transactions are not meticulously documented, they can lead to imbalanced accounts that can hamper the reliability of financial statements. The repercussions, including compliance issues and potential fines that come with non-compliance, can be detrimental to a company’s financial health and reputation.
So, how should you approach intercompany accounting effectively?
How to approach intercompany accounting
The first step is to establish a well-defined process for authorizing and clearing intercompany transactions. It is imperative that a parent company is able to accurately allocate transactions to each subsidiary. This not only justified revenue and tax deductions, but also gives the business key insights into the performance of each company within the business stable.
While software like NetSuite can safely streamline this process, it is crucial for your CPA to create consistent standards that will serve as the foundation for the software’s rules. NetSuite is able to handle multi-currency and multi-subsidiary reporting, but the software needs to be set up correctly to be able to do so effectively.
Once policies, encompassing the products or services exchanged between subsidiaries are in place, automation is key. It is not safe or best practice for businesses to manage hundreds or thousands of transactions manually, especially when dealing with local tax codes, exchange rates, and multiple currencies. But, while automation is no problem for NetSuite, ensuring the correct integrations can make the process a whole lot easier. It is advisable to consult with an expert in this regard – especially when it comes to integrating things like business travel expenses or mileage tracking software, and more.
Finally, with intercompany accounting, centralization is imperative. Managing the finances of multiple companies under one umbrella cannot work if the financial reporting of each individual business is not visible in one place.
Software that supports intercompany accounting best practices
For businesses navigating the intricate landscape of intercompany accounting, choosing the right software can make all the difference.
NetSuite offers the necessary features to automate intercompany accounting best practices for the following reasons:
- It streamlines the intercompany transactions and enhances reconciliation processes ro reduce errors and inefficiencies.
- It allows you to tag purchase requisitions and sales orders as intercompany transactions, providing transparency and ease of tracking.
- It automatically identifies transactions that need to be eliminated during invoicing, which makes for more accurate financial records per subsidiary.
Thanks to its exceptional automation capabilities, NetSuite has endless benefits for businesses with multiple branches. The software is highly customizable and ensures precision and efficiency in transaction elimination and reconciliation. You can update the software’s offering to include functionality from specific NetSuite Modules, depending on the needs of your business.
Its user-friendly features enable seamless tracking of intercompany transactions, making it the ideal software to streamline this critical financial process for businesses.
Are you overwhelmed by all of the touchpoints that come with successfully accounting for intercompany transactions? Our CPAs can help.
At Fusion CPA, we help businesses with everything from general accounting and tax planning to implementing intercompany accounting best practices. We can help you evaluate your current process for monitoring intercompany transactions and implement software to streamline the process. Contact us for help today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
