Expert Explains - Intercompany Balances and Transactions among Group Companies and Other Related Par

The reconciliation of intercompany balances and transactions is an essential part of financial reporting, ensuring that consolidated reports are reliable and comply with accounting standards. When one company sells goods to another group company, provides services, grants loans, records interests, etc., the transaction must be reflected on both sides in such a way that it can be easily eliminated during consolidation. This means that the same transaction must be recorded in both companies in the same period and at the same value. If this is not the case, discrepancies arise, distorting the consolidated result or making it more challenging to eliminate all intercompany balances and transactions.

The reconciliation of balances and transactions is not limited to the consolidation group but affects related parties more broadly. For example, in the annual report, it is necessary to present balances and transactions not only between group companies but also with all related parties. If transactions are significant, checking once a year is not sufficient. Related parties include not only the companies in the consolidation group but also associated companies, members of senior management, individuals with significant ownership, and other companies related to them, etc.

Intercompany balances may not match due to various factors, such as:

• Shipment of goods and delivery clauses (Incoterms). The invoice date and the moment when the goods are actually shipped or delivered may differ. Revenue is recognized when the risks and rewards associated with the goods are transferred. This, in turn, depends on delivery clauses and other mutual agreements. Therefore, especially in intercompany transactions, it is very important to monitor when goods are dispatched, when they reach the destination, and what the delivery clause is.
• Invoice delays. If an invoice is sent too late, it may not reach the other party's accounting before the closing of the month, quarter, or year, and therefore may not be reflected in the correct period.
• Invoice amendments. Once an invoice is issued and sent to the other party, no changes should be made in the system; differences should be resolved through corrective (including credit) invoices. However, in some jurisdictions, it may still be allowed to modify already issued invoices, for example, in cases where there is a clear error on the invoice presented to the other party. In such situations, there is a risk that one party has the new invoice and the other the old invoice, and they do not match.
• Implementation of new systems, such as new data exchange environments, about which information is not shared with all parties, or to which not all group companies have access. As a result, invoices may be overlooked by some related parties.

Reconciliation of intercompany balances and transactions is particularly necessary in large conglomerates or groups of related companies, where the volume of transactions is large and the transactions themselves are complex. It is sensible to establish clear procedural rules that cover regular comparison of balances and transactions, resolution of discrepancies, invoice correction, etc. This helps avoid major corrections at the end of the year and ensures timely and accurate financial reporting. The most common form of balance comparison is still sending balance confirmations, but larger companies also have IT solutions that allow for easy and quick balance comparisons.

When implementing reconciliation of intercompany balances among group companies, the most rapid and sensible approach might be to build balance and transaction comparisons based on Excel, where the financial indicators of different companies are linked by formulas, and discrepancies are quickly identified. BDO specialists can help find or develop the most suitable solution for your company.