Intercompany reconciliation: the ultimate guide

Bank reconciliation is a fundamental activity for any finance team, executed to guarantee data integrity by cross-referencing internal and external sources. However, it is by no means the only type of reconciliation. In fact, there is even a type of reconciliation that compares sources within one entity - intercompany reconciliation.

You may be wondering why intercompany reconciliation is necessary when all the involved sources of data come from companies that sit under the same umbrella or organisational group. This is why it’s important to understand that reconciliation – in any capacity – isn’t about a matter of mistrust, but simply ensuring financial accuracy. In other words, whether dealing with external financial partners or reconciling internal records within a company, the goal is always the same: to achieve and maintain accurate and reliable financial records. 

This is what lays the foundation for irreproachable financial management – ensuring records are both compliant with legal requirements and robust in terms of financial forecasting. To discover how intercompany reconciliation plays a key role in making this happen, make sure to read on.

What makes intercompany reconciliation different?

Intercompany reconciliation, like any form of reconciliation, requires internal and external sources for cross-referencing in order to complete. However, how it defines internal and external is a little different from normal. This is because intercompany reconciliation sees transactions be compared either between departments or between subsidiaries of a parent company. As a result, it is easy to see why defining ‘external’ data sources is a tricky one.

Nevertheless, two data sources are always needed, meaning one will be labelled as ‘internal’, and another being ‘external’ depending on the viewpoint of who is doing the reconciliation. Regardless of who provides the internal source and who provides the external source though, intercompany reconciliation will always be about verifying and balancing transactions that occur between different legal entities within a single parent company or different departments. 

For example, imagine a scenario where Facebook (a subsidiary of the parent company now known as “Meta Platforms”) loans capital to Instagram (another Meta-owned platform/organisation). This creates a liability on Instagram's sub-ledger and an asset on Facebook's. However, on Meta's consolidated financial statement, these should cancel each other out, leaving no impact on the parent company's overall financial position.

The fundamental rules of reconciliation still apply: all transactions must be documented and cross-referenced, with records verified against each other to ensure accuracy. However, intercompany reconciliation has unique challenges when it comes to adhering to these general rules. It requires a keen eye for detail and a thorough understanding of both the internal workings of each subsidiary and the overarching financial structure of the parent company – which is why it can be more daunting and complex than regular reconciliation.

Why is intercompany reconciliation important?

Ultimately, reconciliation is crucial for several reasons, whether internal or external. First and foremost, it ensures financial accuracy. Without it, discrepancies could lead to incorrect financial statements, which might mislead stakeholders, lead to regulatory penalties, or even result in financial losses down the line. For multi-entity organisations, this process is vital for maintaining the integrity of the financial data and preventing double entries across these different subsidiaries.

What’s more, successful intercompany reconciliation is key to meeting regulatory compliance. Financial records must be accurate and transparent to satisfy auditors and comply with regulations. This is especially critical for parent companies managing multiple entities, as discrepancies in intercompany transactions can lead to distorted balance sheets and, so, misrepresentation of financial health.

In summary, intercompany reconciliation is crucial for ensuring the accuracy of internal records, especially within multi-entity organisations. While assets and funds may necessarily move internally between affiliates (as with a parent company and its subsidiaries) these transactions must still be meticulously tracked and accounted for. 

This is because, without proper reconciliation and the elimination of intercompany transactions, financial statements can become misleading, with inflated figures that do not accurately reflect the parent company's net assets when actually all consolidated together. If a parent entity fails to perform these reconciliations correctly they are at risk of non-compliance with accounting standards, potentially resulting in financial and regulatory consequences.

How to be successful at intercompany reconciliation

Given the complexity and importance of intercompany reconciliation, it is clear to see that it is as critical as any other form of reconciliation. Accuracy is paramount, and the process can be time-consuming with even more aspects to consider than with general reconciliation. For instance, manually reconciling transactions across multiple entities can involve hours of painstaking work, sifting through ledgers, invoices, and receipts to ensure every transaction is accounted for and correctly reflected in the parent company's books.

Because of these challenges, automated reconciliation software is a highly advisable solution. Automation not only speeds up the process but also reduces the risk of human error, ensuring that your intercompany transactions are accurately and efficiently reconciled. When managed this way, you can rest assured that the brainpower of your finance team is reserved for more strategic tasks, and that the risk of costly errors is nullified. 

Conclusion

Hopefully this comprehensive guide has helped illuminate exactly why intercompany reconciliation is so key – and why automated reconciliation is both swifter and more accurate when it comes to handling a variety of financial records. 

This process is not just about keeping the books clean – it's about maintaining financial integrity, ensuring compliance with regulations, and providing a clear picture of a company's overall financial status. While manual reconciliation is of course still possible, automating the process is a much more efficient and effective way of managing the many complexities of intercompany transactions. 

Want to find out more about how you can achieve accuracy and efficiency in your financial operations via automation? Book a demo with Aurum today.