Increasingly complex multinational value chains, partly the result of industry consolidation or globalization, and more scrutiny from auditors and regulators are causing more and more companies to run into serious and costly intercompany accounting problems.
Improper or insufficient intercompany accounting practices are partly to blame.
"Multinationals need to treat their internal business with as much rigor and control as they treat their external business," said Kyle Cheney, CPA, a partner in Deloitte's advisory practice who focuses on governance of accounting processes and activities.
Best practices can cut through the complexity created by hundreds of thousands of transactions booked across multiple enterprise resource planning (ERP) systems in legal entities worldwide.
Global value chains—multinational companies' cross-border trade of inputs and outputs taking place within the companies' networks of affiliates, contractual partners, and arm's-length suppliers—account for about 80% of global trade, according to the United Nations Conference on Trade and Development's World Investment Report 2013.
Intercompany accounting issues aren't limited to large multinationals. "I've seen companies with 10 or fewer legal entities that have major problems," Cheney said.
HOW TO PREVENT PROBLEMS
To avoid problems and to effectively support new regulatory pressures, Cheney recommended five best practices:
Standardize global policies that govern critical areas across the organization
Most companies tend to have in place one or two pages of very high-level policies for intercompany accounting. Those policies lack the detail and depth to specify the type of coding necessary to coordinate ERP systems around the world.
One critical area that standardized global policies should address is data management. This allows for intercompany transactions to be easily identified and dealt with across platforms with common charts of accounts. Integrated reporting capabilities that meet tax, statutory, and finance requirements should support the integrated transaction flow. This, along with offering dashboard visibility, demonstrates customized performance metrics that require minimal manual intervention. To isolate intercompany transactions for elimination and reporting, trading partner data should be clearly identified and controlled.
A standardized global transfer-pricing policy should clearly state how a company achieves proper arm's-length transaction pricing worldwide. The tax and finance functions should be working closely in this area critical to intercompany accounting, using integrated transaction-level pricing and analytics.
The IRS and most developed countries require that transactions between related parties occur at "an arm's-length price"—that is, the same price at which unrelated parties would transact.
A standardized global transfer-pricing policy should clearly state how a company has satisfied the arm's-length pricing standard, said Todd Izzo, a Deloitte partner specializing in international tax. Perceived abuse in this area inspired the Organisation for Economic Co-operation and Development's recent base erosion and profit shifting (BEPS) initiative, which has focused increased attention on these cross-border pricing rules. As a result, in some instances, the substantive determination of an arm's-length price has been altered, and companies are now required to increase their disclosure of intercompany transactions and financial results. The IRS recently released final regulations adopting the BEPS recommendation of country-by-country reporting requirements for multinational groups with greater than $850 million of annual revenue (see T.D. 9773). The country-by-country rules require the annual disclosure of related-party and unrelated revenue, earnings, people, capital, earnings, and taxes paid for entities within each tax jurisdiction of residence.
Two further critical areas are in the treasury function. Standardized global policies should address foreign exchange and currency as well as netting and settlement. Companies can effectively achieve this by striving for multilateral settlement based on a defined cash management strategy.
Establish a center of excellence
A center of excellence is a group of tax, finance, IT, and treasury experts from within the company who on a global level understand the accounting and technology involved in intercompany accounting. Cross-functional involvement is key. Intercompany accounting should be part of the performance evaluations for members of the group, who take on oversight of enforcing the standardized global policy and providing tools and capabilities to maintain it.
Set up a master data management program to execute standardized global policies
Technology solutions are key to executing standardized global intercompany accounting policies because the software can help control activity across multiple ERP systems in a company.
A master data management program ensures that new and acquired accounts are set up in alignment with the policies and that intercompany transactions are processed in the same, standardized way. Integrated transaction flow across technology platforms should include inventorying and categorizing the transactions by type and processing them based on standardized procedures. Transactions between legal entities should incorporate technology-enabled approval routing and dispute resolution. Corporate allocations and centralized service charges should also follow standardized methods and use standard calculations to ensure consistency and efficient processing.
Technology solutions are emerging to support an integrated transaction flow across platforms. One is an accounting hub, which provides a centralized accounting database that is rules-based and codes transactions in a central repository. In-memory computing is another solution. It stores more data in a central place while maintaining speed and accessibility to information. A third solution is applied robotics, which uses computer-code structures to perform rules-based, routine activities, such as producing an invoice, checking amounts and currencies, and routing a transaction through an approval process.
Define a cash management strategy to net and settle transactions
To achieve effective netting and settlement, which is critical for the treasury function, companies need multilateral settlements based on a cash management strategy that defines when settlements require cash transactions versus accounting entries.
Having a cash management strategy in place not only reduces bank fees and the amount of cash sitting in accounts not bearing interest, but it also provides information that allows the company to effectively hedge currencies.
Use a third-party reconciliation software tool that matches transactions
Reconciliation and elimination can be time-consuming and resource-intensive for the accounting function. To reconcile transactions across multiple ERP systems, a company should use software that can match transactions from one legal entity to another and can identify a single transaction when a problem pops up.
A variety of third-party reconciliation tools on the market have this functionality. Some are capable of managing high volumes and are used in the retail industry. Others are scaled down to provide the same type of service for small companies with fewer transactions.
Providers of these tools include BlackLine, Oracle, and Trintech.
The 5 biggest intercompany accounting challenges
Intercompany accounting faces additional challenges as it deals with money that flows across multiple legal entities of a company, often globally. A 2016 Deloitte poll of more than 3,800 accounting and finance professionals suggests that disparate software systems in the different legal entities pose the biggest problem (21.4% of respondents), followed by intercompany settlement (16.8%), complex intercompany agreements (16.7%), transfer-pricing compliance (13.3%), and foreign exchange exposure (9.4%).
Growth through acquisition is a key strategy at TrueBlue, an on-demand staffing and professional recruitment company based in Tacoma, Wash. In the past two years, the publicly traded company has increased annual revenue 62% to about $2.7 billion through acquisitions that expanded its business geographically and added services, according to filings with the SEC.
Consolidation is underway, but for now the rapid growth has left in its wake multiple subdivisions using different ERP software and point-of-sale systems, said Shana Kneib, CPA, CGMA, associate accounting manager at TrueBlue. The flow of data from each system into the core ERP has yet to be verified and validated to ensure accuracy in reporting.
"Disparate software systems are definitely a challenge," Kneib said. "A consolidated story to describe the period's activity can be difficult to pull together when the data is housed in multiple systems. Add manual processes to the mix, and the struggle can be magnified without solid communications in place."
To avoid problems, communication in any form—email, teleconferences, meetings, and phone calls—is key, she said. During the week that TrueBlue goes through the monthly close, finance staff at corporate headquarters assembles for a 15-minute daily standup to discuss issues and a daily teleconference with their colleagues in Chicago, who manage part of the business.
"If you don't have consistent systems, you have to communicate really well to understand and to meet deadlines," Kneib said.
Cooperation of accounting, tax, and treasury can also make it easier to tackle the challenges, especially when the legal entities involved in intercompany accounting follow a framework of standardized global policies that governs critical areas across the business.
A minority of the participants in the Deloitte survey said their company follows such a holistic approach. More than two-thirds of respondents said an intercompany accounting framework was a goal they were working toward, but only 9.2% said it was in place. Accounting, tax, and treasury had combined efforts to manage intercompany accounting at the businesses of about one-quarter of respondents. The majority of respondents (55.7%) said accounting had taken the lead.
About the author
Sabine Vollmer is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact her at svollmer@aicpa.org or 919-402-2304.
AICPA resources
Articles
- "Final Rules Govern U.S. Country-by-Country Reporting," JofA, June 30, 2016
- "Profit Shifting: Effectively Connected Income and Financial Statement Risks," JofA, Feb. 2016
- "Temporary Regs. Under Sec. 482 Coordinate Transfer-Pricing Rules With Other Code Provisions," The Tax Adviser, Jan. 2016
- "Don't Let Foreign Currency Fluctuations Impair Performance Measurements," JofA, Dec. 2015
- International Taxation (#732012, text)
- Transfer Pricing (#165376, one-year online access)
For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.
