Intercompany Reconciliations Done Right - Part 1

Intercompany eliminations are a key step in the creation of consolidated financial statements.  The objective is to ensure the consolidated financial statements present an accurate picture of revenues, expenses, assets, liabilities and equity – ensuring they aren’t inflated due to transactions occurring between subsidiaries or companies in the group.

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Several types of intercompany (IC) eliminations must occur to ensure the accuracy of consolidated financial statements, some examples are;

  • Intercompany revenue and expenses: The elimination of the sale of goods or services from one entity to another within the enterprise or group. The related revenues, cost of goods sold and profits must all be eliminated.
  • Intercompany debt: The elimination of any loans made from one entity to another within the enterprise or group since they only result in offsetting notes payable and receivable, and offsetting interest expense and interest income.
  • Intercompany stock ownership: The elimination of the parent company’s ownership interest in its subsidiaries, or ownership across subsidiaries.

Intercompany transaction volume can be significant and difficult to identify.  To ensure all this activity is identified, eliminated and documented correctly for auditors requires a detailed system of controls.  Managing and eliminating IC activity via Excel spreadsheets and email is not a recommended approach for large global enterprises with a significant number of IC transactions.

The preferred approach is to leverage packaged financial consolidation software, which is designed to simplify and automate the tracking and elimination of intercompany transactions.  These solutions support the creation of specific intercompany accounts and the reporting capabilities that enable accounting staff to match and eliminate IC transactions and balances. This also allows accounting staff to identify, research and resolve out-of-balance situations before the consolidated financial results are finalized.

Not All Consolidation Software Is Equal

Most financial consolidation software packages provide core functionality to address requirements, such as currency translation, intercompany eliminations, journal adjustments and partial ownership of entities.  But not all packages are created equal – not all of them provide the same level of functionality in each area, and they may utilize different approaches to intercompany eliminations.

One example is the requirement to write custom business rules to consolidate data vs. using a consolidation hierarchy.  Software packages that require custom business rules to consolidate data require more work to set up initially and to maintain going forward. The use of consolidation hierarchies, however, makes the system easier to configure and maintain for both single and multiple consolidation hierarchies.

Another example is the use of “elimination entities” vs. an intercompany dimension to identify and manage intercompany eliminations across existing entities.  Software packages that rely on creating multiple elimination entities to capture IC activity require more work to set up and maintain.  The better approach is systems that leverage an IC dimension to identify, match and analyze intercompany transactions between existing entities and an elimination member to capture direct and indirect eliminations to make sure they never disappear as they eliminate up the consolidation hierarchy. 

Also, when IC entities are used, users lose visibility into the individual IC balances and only see the totals in the IC entities.  This makes it difficult to understand the where the out of balance condition resides, and what needs to be addressed and by what party.  An IC dimension captures all party-counter-party balances and provides complete visibility into what is in and out of balance.  This allows business users to quickly and easily identify and correct the discrepancies.

Another example is systems that actually store consolidated balances and intercompany elimination entries in a database vs. those that only consolidate and expose intercompany eliminations when reports are run. 

Systems that store consolidated data and IC elimination entries in a database provide a big advantage when auditing financial statements –  detailing the original source of the data, currency translations, eliminations and any other adjustments that resulted in the consolidated accounts.  Systems that calculate and consolidate data only when reports are run are less trusted by auditors since the numbers can change and there is no record of what the number was previously.

And yet another approach is systems that duplicate base entities and their data vs. those that leverage a single shared base entity that can be rolled up in infinite hierarchies – for example, to consolidate based on a management view of the organization vs. a legal or statutory view. The former approach requires the administrator to identify IC relationships in each entity structure vs. setting this up and managing it in one place.  The risk of this approach is that it requires the administrator to ensure the data which has been loaded multiple times is the same each time it is loaded.

The OneStream Approach to Intercompany Eliminations

The inventors of the OneStream XF SmartCPMTM platform had prior experience developing the most powerful market-leading financial consolidation and data quality solutions of their time almost 20 years ago.  But technology and market requirements have changed. 

In response, the OneStream team has now developed the most advanced financial consolidation, reporting and data quality solution in the market.  This includes providing powerful intercompany elimination capabilities that can handle sophisticated business needs yet allow for easy reconciliation.icr blog pt 1 2.png

With well-designed, pre-built and easily customizable dimensions, OneStream XF consolidates data based on organizational hierarchies and automatically eliminates intercompany transactions and balances at the first common parent – in all hierarchies (e.g., management, legal, tax, etc.).  Eliminations never disappear and segment reports for business unit A vs B and their eliminations can be produced instantly without writing any rules.

This is done without the creation of specific intercompany elimination rules or relationships within hierarchies, which makes the system much easier to maintain vs. other systems in the market.  There are no special IC entities that need setting up. Existing entities and accounts are simply flagged as including IC activity.

In addition, there are some great reports that really help with viewing intercompany activity –reports that are ready to view “right out of the box” with OneStream XF.  For example, OneStream has a focused intercompany elimination “grid” that appears in our workflow.  This allows users to comment and communicate with other users regarding intercompany balances. 

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The power of these IC system reports is that they ignore security for the intercompany accounts.  This allows each intercompany trading partner to see matching balances across entities, even though they don’t have access to the offsetting amounts.  And they can see their IC balances in multiple currencies.  This feature is helpful in getting users to take ownership of the intercompany matching process, which is usually reserved for the corporate consolidation team.

The advanced architectural design of OneStream XF, combined with its reporting and the ability for users to drill-down into transactional details, provides an unmatched ability to see and resolve intercompany balances and rapidly close the books at period-end.

Learn More 

In part 2 of this series we’ll take a deeper look at the OneStream approach to handling intercompany eliminations.  In the meantime, to hear how our customers are benefiting from these advanced capabilities, check out this customer case study and video from Evoqua Water Technologies.

 Evoqua Customer Case Study & Video

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