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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
long-term.

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:

1. The structure of the data to consolidate and processing in consolidation
2. The reconciliation of intercompany balances: is there hope?
3. IFRS and local GAAP
4. Statutory consolidation and reporting: unified consolidation
5. Group structure
6. Financial communication
7. Impact of future technological changes on consolidation