Getting Intercompany Right is Critical to Reporting & Business Strategy

Without effective intercompany financial management (IFM), uninformed business strategy is inevitable. Given the significant impact that intercompany data, or the lack of it, has on management reporting, statutory reporting, and consolidated reporting, getting intercompany processes right is critical to accurate and timely decision-making. 

The work of statutory reporting is often left to specialized, expert statutory accountants. But, for their work to be right, accurate data must be effectively collected from all corporate entities. Optimizing intercompany processes, as well as gathering and organizing data in systems where it can be securely accessed, requires extending to the very edges of the enterprise. Without innovative leaders and planners to champion this level of intercompany discipline, accurate statutory reporting is cut off at the knees. 

Fundamentally, statutory accountants can’t do their job effectively if intercompany data is confused or unavailable. That’s particularly true in the current environment of rapidly evolving tax regulations including those resulting from BEPS and BEATS initiatives. At multiple levels—federal, state, local, and regional—tax jurisdictions now demand an accurate reporting of intercompany transactions just as is expected of third-party transactions.

Providing accounting with what amounts to a virtual intercompany subledger comprising all intercompany transaction data, supporting documentation, and calculations for BEPS, BEATS, indirect taxes, as well as other regulations, enables multinationals to accurately report to tax authorities in every jurisdiction while avoiding tax leakage, unanswerable audits, and reputational risk.

Despite this, deficiencies remain common. Respondents to a study by Dimensional Research, published in 2022, reported missing opportunities for tax deductions (43%), experiencing tax leakage that resulted in higher overall costs (38%), exposure to the potential for tax penalties (38%), and an increase in fees for statutory and tax audits (32%).

It is also important to recognize that these efforts have impact far beyond the individual entity or local tax jurisdiction. Maximizing intercompany deductions and minimizing tax leakage improves the company’s consolidated effective tax rate and net income. Tightening up intercompany processes across worldwide operations can really add up.

Highly accurate, automated, and searchable data for statutory reporting may be the most significant and obvious win for modernized IFM, but management reporting also stands to benefit from good processes and a single source of intercompany truth from which decisions can be made.

Business unit leaders are judged on profitability and other metrics which solid IFM processes and accurate data support. Given that intercompany transactions account for 70% of world trade, broken intercompany processes make it impossible to understand what’s actually happening across a business unit.

Without availability of accurate intercompany data, business unit leaders are apt to make deficient—or potentially disastrous—strategic decisions. This jeopardizes operational decisions such as incentivizing the right team objectives, or to making good decisions on how, for example, to optimize supply chain or manage staffing levels. When leaders are not confident in performance reports, they cannot be decisive with their forecasting either. Worse, those that believe that incomplete reporting is solid, mis-forecast business unit volumes and costs.

Consider the example of cost allocation data. When intercompany cost allocations have yet to be automated and there is no surplus accounting capacity to take on the task manually, multinationals do not allocate costs down to a granular level. For most, this forsakes business unit leaders of the insights required to make informed decisions and makes it impossible to optimize operating margins.

Issues that ripple upward into consolidated reporting include trading partner imbalances, incorrect transfer pricing, and inaccurate indirect taxes.

Although even today some accountants have the misconception that intercompany is merely a “left pocket, right pocket” exchange summed up in consolidated reporting, as poor intercompany discipline leads to inaccurate P&Ls, cash flow statements, and balance sheets, mistakes metastasize in consolidated reports.

If intercompany transactions are not eliminated correctly, any out-of-balance accounts can seriously impact financial statements. Consolidated reporting failures lead to delays in reporting, restatements, reputational risk, regulatory fines, and legal jeopardy.

In the Dimensional Research report mentioned earlier, survey respondents indicated that inadequate intercompany practices increased risk of SEC investigation (43%) and that the reputation of their organization was at risk due to a financial restatement (38%). An earlier study found that intercompany issues were one of the top-five reasons for restatement.

Although these can be the most obvious failures of incomplete, disorganized, and unavailable intercompany data, Tax and Treasury are negatively impacted as well. Without accurate data across all trading relationships globally, teams cannot effectively net and settle, manage working capital, forecast cash, or manage FX (foreign exchange) risks.

A comprehensive IFM approach allows you to get accuracy and depth in statutory, management, and consolidated reporting—enabling much clearer analysis, day-to-day decisions, and strategic planning.

BlackLine Intercompany has proven to help multinational enterprises implement a virtual intercompany subledger that allows easy and secure access to intercompany data across all these reporting functions.