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Intercompany Revenue and Cost Reconciliation

How do you manage intercompany revenue and cost reconciliation as well as intercompany revenue and cost elimination upon consolidation? I am having challenges because unlike intercompany receivables and payables reconciliation, it is very hard to reconcile revenue and cost given that there are more ledger accounts to be reconciled. Also, it is very hard to track what GL accounts were used to post a particular intercompany invoice to ensure that there are no variances upon intercompany elimination/consolidation. Any ideas, please? Thanks.

Answers

Richard Archer
Title: Principal
Company: CG Management Solutions
(Principal, CG Management Solutions) |

How is your Chart of Accounts structured? Do you have a cohesive, uniform chart of accounts or has each new intercompany unit been able to keep its own, separately structured chart of accounts as the units have been added, divested, or merged?

If the former, you possibly have an easier job of reviewing/revising your account structure to ensure that it supports providing the information needed for eliminations and then mandating that the business units actually map their sales and costs properly for accounts identified as being intercompany. Then, your primary challenge should be accounting for-reconciling goods in transit at the time of accounting close.

If all business units have the same cut-off date, the goods intransit reconciliation should be easier, again assuming that your accounts are structured properly and the units have sales & costs mapped in their systems to the proper accounts. If the business units have different cut-off dates, your reconciliation headaches are increased significantly and there may be little you can do to reduce that part of your work effort.

If every business unit has its own chart of accounts, do they at least have sections for intercompany activity in their account structure and do they use them consistently and properly?

Do they all know which of their customers are intercompany accounts subject to consolidation? If your company frequently acquires, divests, or merges business units, your problem may be that the business units haven't been properly mapping the sales & costs for intercompany customers, because they don't know who the intercompany customers are.

With separate charts of accounts for the business units, do you have your consolidation mapping set up correctly so that the different accounts from your business units at least map to the correct consolidation lines for intercompany activity?

Can your business units add or delete accounts on their own or do they have to get your approval for chart of account changes? If they can make account changes on their own, the odds are that your consolidation mapping isn't correct anymore.

Do you receive data from your business units for consolidation in an Excel spreadsheet? If so, then your data probably doesn't align, even if you think you have the consolidation input data templates for the business units locked to prevent changes. It doesn't take much to break a locked Excel spreadsheet, depending on which version of Excel you are using across the company. Even worse if there are multiple versions being used across the business units.

Can you query the sales and accounting databases for the business units so that you can extract data for analysis? If so, there are multiple data analytics tools you can use that will help you extract, cleanse, sort, and match data from among the business units. Can even be done in Excel, but with higher risk of error and less efficiency.

If the business units are causing the problem in being able to reconcile elimination data for the consolidation, make them responsible for the reconciliations. The Fortune 500 company I first worked for required this. Every business unit had to reconcile sales, receivables, and payables with every other business unit it dealt with. All units had the same early cut-off (as I remember it was 3 days). In the time between early cut-off we had to exchange data and reconcile intercompany accounts in time for a clean month end accounting close. Our monthly reporting included a schedule showing that we had exchanged the data and reconciled the intercompany accounts. Then, all corporate had to do was match totals. It wasn't pleasant for the units that didn't match (even by as little as $0.10) to get a month end call from the Corporate Controller.

If your accounting systems don't enable querying the sales databases of the units to do a reconciliation or any of your units have heavily manual billing processes, there may not be much you can do, except make sure that the chart of accounts is structured properly, is applied consistently, and is correctly mapped to your consolidation schedules.

Richard Archer
Title: Principal
Company: CG Management Solutions
(Principal, CG Management Solutions) |

One important caution - If the structure of your general ledger accounts is a contributor to your problem, take a look at the new revenue recognition & sales cost capitalization accounting standards BEFORE you make any changes to your chart of accounts. If your company will be subject to the standards, then you might as well take the steps to align your accounts structure to the accounting standards now. However, in order to do that, you will have to complete the analysis of the various revenue streams as required by the new accounting standards. This applies for both IFRS and US GAAP.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Intercompany revenue and costs should be processed as any other revenue and costs accounts/transactions. Meaning, company A bills (for revenue) and company B recognizes when received (for costs).If you want more detail, you can make separate AR/AP subaccounts and for each major revenue and cost accounts.

There should NOT be any trouble if it is processed as if regular transactions. Think, reconciling with a vendor (AP) or a client (AR).

How you deal with the accounts (i.e. "Payment" or process of consolidation) really depends on the group company structure and agreements. Ex, there won't really be any reconciliation (technically) if there is an arms length transaction and you pay invoices when received. If not, the same revenue and cost accounts will stand out (ie, unpaid and an AR on the other side).

Your auditors will thank you.

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