The reconciliation of intercompany balances: is there hope?
By Allen White, Sigma Conso co-founder & Administrator
We feel that it is necessary to address briefly an area that has historically been a weak link in the consolidation process, that is, the reconciliation of intercompany balances.
We have identified several invariable aspects of consolidation over the past 40 years:
- Regardless of the size of their perimeter, a majority of groups have an abnormally high number of differences in unreconciled inter-company transactions which are recorded at a critical time in the process, that is, too late.
- This often leads to big meetings during which, after giving out the bad grades, consolidation managers and their counterparts leave after agreeing to new and promising measures that are complied with during the next consolidation period, before old habits return.
- Over the past four decades, the resources implemented to improve this situation have relied on setting up information flows, first using paper forms, then with Excel and via email exchanges. Everyone inspects their own inter-company positions with their partners, although most of them are already correct. This is a waste of time resources.
- With the arrival of ERP software and the resulting high degree of group centralisation, it was reasonable to expect greater effectiveness in the interco area. It enables transactions recorded in the accounting of a company related to another company of the same group to be automatically allocated in the accounts of that partner. What happens in practice is quite different: either groups don’t acquire that option or they don’t use it. Any hope of seeing these types of situations undergo positive change in the future will again be found in new technologies. Some software companies have developed inter-company balance reconciliation software based on Internet communication properties combined with Web software functionality that removes all geographical and time constraints.
In practice, from the standpoint of principles, this means that:
- All of the companies of a perimeter enter their interco positions via the Web.
- Information can be provided freely according to the level of detail available (balances or transaction amounts).
- Companies can carry the reconciliation process at any time without any intervention on the part of consolidation
managers and therefore understand the extent of their mutual disagreements.
- Reconciliation is deemed completed, with an explanation provided for residual differences, at a time decided by the group.
For the first time in 40 years of dealing with the interco issue, not only do there appear to be many benefits, but they are now
The right tool exists today. Groups must become aware of the benefits of making an investment in this respect, despite the overwhelming feeling of contributing to accounting errors in their companies and to an activity which is, when all is said and done, not very profitable.
Yet, this step must be taken to ensure optimisation of the consolidation process!
Articles in the “Future of Consolidation” series:
- The structure of the data to consolidate and processing in consolidation
- The reconciliation of intercompany balances: is there hope?
- IFRS and local GAAP
- Statutory consolidation and reporting: unified consolidation
- Group structure
- Financial communication
- Impact of future technological changes on consolidation