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Accounting & Disclosure

Effective Interco Accounting Frameworks Elusive

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August 25, 2016

Survey: intercompany accounting bedevils corporates and increases risk.

Abacus SidewaysAs treasury executives scout for financial exposures and risk one source that appears to be frequently overlooked may be in their own backyards: inadequate accounting of transactions between various legal entities in their own organizations.

A recent survey by Deloitte of more than 3,800 professionals, largely from accounting (47.2%) and finance (22.9%), found that just 9.2% of respondents said their companies have holistic, efficient and well-communicated intercompany accounting (ICA) frameworks. This is despite the clear likelihood of insufficient accounting of transactions between affiliates possibly leading to inaccurate financial reporting and all the accompanying travails.

“While a lot of accounting, tax, treasury, and other corporate leaders are focused on money flowing into and out of their organizations, intercompany accounting—or the money flowing across an organization’s legal entities—can become a real challenge to those experiencing global growth, M&A and supply chain integration,” said Kyle Cheney, Deloitte Advisory partner, Deloitte & Touche LLP, in statement,

In an accompanying webinar, Mr. Cheney noted that that global expansion and the resultant transactions between affiliates in different jurisdictions and integrated supply chains have led to a dramatic increase in intercompany transactions and ICA challenges. In addition, companies that have grown through M&A often work on multiple enterprise resource planning (ERP) systems, complicating intercompany transaction settlement.

Prashant Tekriwal, director at Deloitte, noted that regulatory initiatives, including the OECD’s base erosion and profit shifting (BEPS) and the US Treasury department’s proposal related to US tax code Section 385 will likely further complicate matters.

“International and US tax trends, such as BEPS and 385, are likely to create documentation and reporting requirements on related party debt instruments and cash pooling arrangements managed by treasury,” Mr. Tekriwal said.

Melissa Cameron, head of US treasury practice for Deloitte, says that in light of Section 385, companies need to pay close attention to outstanding loans to make sure they are managing the life cycle of those loans. That’s because after the rules kick in, possibly as early as October, loans that go too far beyond their life cycle could turn into equity, thereby triggering different tax treatment. “When we look at intercompany loan practices, we see they’ll need vast improvements” in documentations and servicing, he said.

Mr. Cheney added that for big and small companies, internal transactions incorporating products and services, fee sharing, cost allocations, royalties, and financing activities can create inefficiency, financial exposures and reporting risk.

The plurality of respondents (42.5%) said their companies aim to achieve consistency in intercompany accounting, but it’s still a work in progress, and just over a quarter said achieving an intercompany accounting framework is a goal, but they’ve yet to standardize their governance.

In terms of where the respondents saw the benefits from a comprehensive intercompany accounting program, the largest portion (21.4%), pointed to a more efficient month end close and/or statutory reporting process, while 13.2% said financial reporting integrity, 5.6% a more reliable internal control environment, and 3.1% a reduction in fines, penalties, or unintended taxable events. Just over 40% marked all of them.

The greatest challenge for survey respondents was disparate software systems (21.4%), followed by intercompany settlement (16.85), complex intercompany agreements (16.7%, transfer pricing compliance (13.3%), and FX exposure (9.4%.

The majority of respondents (55.7%) saw the accounting department taking the lead in managing their companies’ intercompany accounting, followed by a combination of accounting, tax and treasury (24.4%). Treasury taking the lead was only 2.5%.

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