Intercompany accounting is an all-important process that any parent company must get right. If not done correctly, it can gravely hinder the preparation of the company's consolidated financial statements. The following best practices for intercompany accounting will make this process much more straighforward and hassle-free.
Best practices for intercompany accounting
1. Continuous closing
It is fair to say that every accounting team dreads the closing process. It is cumbersome and time-consuming. So how does moving from period closing – either monthly or quarterly – to continuous close make any sense?
Continuous close is the practice of turning period-end closing tasks into day-to-day activities over an accounting period. Accounting teams are increasingly adopting this approach due to several major advantages.
Matching and reconciling transactions a few weeks old are inevitably more tiring and error-prone than doing them on a continuous basis. Bringing those tasks closer to the point of the transaction is not without challenges, including retraining accounting staff and updating process, but the benefits are worth the try.
Moreover, by spreading stressful intercompany tasks like reconciliation and elimination throughout an accounting period, your accounting team can avoid the dreadful workload surge when the period end comes. This should be a welcome change.
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2. Standardised global policies for data management
The biggest issue many companies face is the wide variety of reporting practices being used. If the parent company categorises and tags its transactions in one way and the subsidiaries do it another way, the result will be another data mess that your accounting teams have to deal with. Errors in your financial statements are almost inevitable, which will require your teams to go through the same mess again to sort out these errors.
Therefore, it is very important to create standardised practices and policies that detail every step of your accounting process and how to collect, tag, and store transactional information. This will allow your accounting teams to organise and file your financial reports much more efficiently and lower the risk of error substantially.
While it is not advisable to apply across-the-board uniform policies to every accounting process, as the differences among local laws would make such policies much too vague, policies pertaining to intercompany reporting and management are much easier to be enforced across the entire organisation.
Centralised document management is another crucial aspect. In most cases, enterprises have their transaction documents – invoices, contracts, and purchase orders – scattered through different systems, making reconciliation discrepancies much harder to fix. A central repository for all intercompany records ensures your company no longer faces these hassles.
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3. A central intercompany accounting team
Another way to improve your intercompany accounting is to establish a cross-functional team whose members are drawn from various functions with your enterprise – finance, treasury, compliance, etc. This team should have eyes on all transactions in the vertical chain of operations and can determine how information is inputted into the central database.
4. Specialised reconciliation and elimination software
Matching transactions among entities within an enterprise remains a thorny issue in intercompany accounting. As internal transactions are normally processed and stored in multiple IT systems – ERP, accounting software, procurement software, etc., - a specialised tool is needed for faster intercompany reconciliation and elimination.
Such tools may sound like a luxury item for some parent companies, but the investment will pay for itself many times over in saved time and effort. You can opt for either single-purpose reconciliation and elimination software or a more complex enterprise performance management software suite that comes with reconciliation and elimination function.