Intra-group transactions: identifying differences
Intra-group transactions are often only thought to be part of the consolidation process because they are eliminated at consolidation time. In fact, they are an integral part of the accounting close, of effective cut-off tracking and of anticipating differences that can result in disputes or arbitration. As a result, optimisation of the reconciliation process can save several days on the closing process and increase its reliability. Optimisation means that the sources of potential differences must first be identified.
Intra-group transactions: definition
These are financial or commercial transactions which involve two companies of the same group simultaneously.
The most common example is the issuing of a sales invoice for the supply of services. The company issuing the invoice will recognise a receivable in its balance sheet and revenue from the sale on the income statement whereas the purchasing company will have a payable on its balance sheet and an expense on the income statement.
In fact, on the closing date, the consolidated balance sheet will include an asset and a liability resulting from a “reciprocal” transaction which doesn’t exist within the group. At the same time, the revenue and expenses in the income statement will be overvalued, as they include all of the internal transactions for the period.
Which accounts are reciprocal?
With the exception of the equity, holdings, intangible and tangible assets and inventory accounts, most of the other accounts can include intra-group transactions. The logic behind this is that there will always be an equivalent counterparty in the other group entity.
The process to search for differences
The search for differences in intra-group account balances is often very tedious for the consolidator who often doesn’t have access to the information source. In addition, in certain instances, there is a risk that a reciprocal transaction has been entered in an income account by one company and in a balance sheet account by the other company. Rigour, order and common sense are not always sufficient to achieve the goal sought, that is, reconciliation of the amounts between the group companies. Using a reconciliation software package can, therefore, be useful.
Common reasons for intra-group differences
Despite the implementation of reconciliation procedures upstream of the actual reconciliation, differences still often exist at the time of final reconciliation. The usual reasons are:
- Entry (cut-off) date discrepancies
- Different close dates
- The conversion of transactions initially denominated in foreign currencies
- Sales accounted for as fixed assets at the purchaser’s
- VAT paid by the purchasing company
- Rediscounting of debt with the banks
- Another reason, to be identified!
By definition, the management of intra-group transactions is complex due to the number of people involved within the group and the large number of possible combinations of accounts and situations.