Intercompany Reconciliation

Intercompany reconciliation is account reconciliation applied to the one case where the independent evidence is not independent at all. Every other reconciliation ties the ledger to something outside the company: a bank statement, a vendor subledger, a physical count. An intercompany balance ties to another entity's own books. One entity records an intercompany receivable; the related entity records the matching intercompany payable; the two figures have to agree exactly, transaction by transaction, before either entity's reconciliation, or the group's consolidation, is actually complete.

That is what makes it the hardest case structurally, not the arithmetic. Two teams, and often two ERPs, two charts of accounts, and two close calendars, have to arrive at the same number independently. A mismatch can come from timing (one entity posts an intercompany invoice before the other receives it), foreign exchange (the two sides translate the same transaction at different rates or on different dates), netting (one entity nets a balance the other reports gross), or a straightforward missing entry on one side. None of these show up by inspecting either ledger alone; they only appear when the two sides are compared line by line.

The reconciliation feeds directly into consolidation. A group's consolidated financials cannot show revenue one entity earned by selling to another entity in the same group, so intercompany balances get removed through elimination entries (glossary entry planned) once both sides agree. An intercompany balance that does not reconcile cannot be eliminated cleanly, and it is a common cause of a consolidation that does not tie or has to be restated. A documented intercompany agreement (glossary entry planned), setting the pricing and terms for the flow between entities, is what a reviewer checks the recorded transaction against when the two sides disagree; it is also the same document a transfer pricing analysis relies on.

The signals of a program that is not actually current look the same as anywhere else in reconciliation, just harder to hide. An intercompany balance aged more than a quarter with no explanation is not a timing difference anymore. A "true-up" that only happens once a year, at consolidation, means the accounts ran unreconciled the rest of the time. And a plug booked to force the two entities' balances to match defeats the entire point: the balance is supposed to prove the two books agree, not assert it.

Related terms: Account Reconciliation, Bank Reconciliation, Balance Sheet Reconciliation

Related skill: Intercompany reconciliation

Go deeper: Account Reconciliation: The Complete Guide

Matching two entities' books against each other, by hand, across every intercompany flow and every currency, is exactly the kind of volume work a person should not be doing every close. Adopt's agents pull both entities' intercompany subledgers, match the population transaction by transaction across the two books regardless of which ERP each entity runs, and hand back only the balances that do not tie, with the likely cause, timing, FX, or a missing entry, attached to each one. Sign up free.