For all organizations concerned, intercompany accounting is a complicated field. But, exactly, what does it entail? What are the various actions to take and the standards to follow? How might these processes be made more efficient? What are the tax risks and possible penalties that would have to be faced if things are not executed properly in terms of any aspect of business finance?
An intercompany accountant is the best person not only to answer these questions but to undertake, or consult on, the complexities of intercompany accounting in general. Pearl Lemon Accountants are lucky enough to count such professionals among our experienced team members.
All financial transactions carried out and documented between the different companies of a single group or organization, as well as the “removal” of these flows at the end of the financial year, are referred to as intercompany accounting.
All companies having external bodies or subsidiaries in other domestic locations, or even abroad, must use intercompany accounting. In most jurisdictions, companies of a particular size must prepare consolidated accounts for intercompany flows. This includes both reciprocal and non-reciprocal transactions (intercompany transactions, or “intercos” as they are sometimes referred to).
An experienced intercompany accountant, like those on the Pearl Lemon Accountants team, will consider, explain and oversee the different steps of intercompany accounting, from accounting consolidation to the types of transactions that are commonly processed, as well as the various problems that can develop when reconciling accounts and ensure that your organization is doing everything right.
The different companies and subsidiaries that make up a group or corporation tend to trade goods and services with one another. Intra-group transactions are the term for these types of transactions. Consolidation is described in the context of intercompany accounting as the technique through which a group wipes out transactions performed between its numerous companies. The goal is to merge the parent company’s and subsidiaries’ accounts, enabling the production of a complete balance sheet and income statement that accurately reflects the group’s financial status.
The accounting consolidation procedure becomes increasingly complex as the company grows in size. Discrepancies are most common during the account reconciliation process.
The following are some of the reasons for these accounting discrepancies:
Intercompany accounting experts must discover ways to simplify and streamline consolidation activities in light of these challenges. This can take the form of standardizing accounting practices throughout the group’s or corporation’s many subsidiaries, as well as digitally modernizing the group’s financial and accounting processes.
What Transactions Should Be Included in Intercompany Accounting Consolidation?
Intra-group transactions can be divided into two categories:
The elimination of reciprocal transactions (or intercos) is conceptually simple because the amount identified as a receivable in one company’s accounts is treated as a debt in another’s accounts. After the elimination procedure, the consolidated income statement remains unchanged.
Because a matching sum is not recognizable in the records of another company within the group, the removal of non-reciprocal transactions is unique. As a result of the elimination procedure, the consolidated income statement is altered.
What does this look like in practice? Here are some common examples:
The reconciliation process must be optimized, currency hedging solutions must be considered, and a more cohesive approach to management must be taken at the group level to eliminate intercompany accounting errors. It’s tricky stuff, involving all kinds of rules and regulations – as well as subjective decisions at times – that can be challenging for a general accountant or in house bookkeeper to handle.
Because of the possibility of fraud (and even money laundering) HMRC often holds groups to higher standards than individual companies and may scrutinize their submissions in far greater detail. Having constant access to specialist intercompany accountants will ensure you are prepared to answer any questions the tax authorities may have as well as ensure everything submitted to HMRC is accurate, legal and on time.
You and your company deserve every chance to succeed, and choosing the right intercompany accountant will allow you to focus on building your businesses rather than worrying about money.
Pearl Lemon Accountants has a lot of experience with accounting for multiple businesses within a group. Our company itself is part of a wider organization, the Pearl Lemon Group, and as we serve as that organization’s accountants we HAVE to be great at intercompany accounting, our own survival and that of the other member companies, depends on it. And you can be assured we’ll handle your intercompany accounting in the same fervent and dedicated way we do our own.
You can also expect exceptional customer service as a result of the Pearl Lemon Accountants’ team’s approachability and professionalism. We understand that not everyone enjoys accounting as much as we do, so we try to cut through the jargon and relieve you of the pressure of trying to understand what we are saying just to understand what we have done for your businesses!
We not only look after your business accounts as if they were our own, but we will also look for cost-effective and legal ways to save you money at every turn. Across your group there are almost certainly a myriad of ways that money can be saved and incomes can be increased and we will help you find them.
You may be shocked to learn how easy adding an outsourced intercompany accountant team into the mix really is. Contact Pearl Lemon Accountants today to discover more about how we can help your growing organization.
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