Intercompany Reconciliation: Definition

What is intercompany reconciliation?

Intercompany reconciliation, also called intragroup reconciliation, means verifying that transactions between companies in the same group are recorded the same way on both sides. If subsidiary A invoices subsidiary B for a service, A should have a receivable and B a payable for the same amount. When the two intercompany balances don't agree, you have to find the reason before closing the period.

It is a step before consolidation. On consolidation, transactions inside the group are eliminated, because the group can't sell to itself. If intercompany balances don't match, those intercompany eliminations leave differences that distort the consolidated statements.

Which transactions are included

• Sales and purchases of goods or services between group companies.
• Recharges of shared costs, such as central services or rent.
• Loans between companies and their interest.
• Dividends and capital contributions.
• Payments one company makes on behalf of another.

Why intercompany balances don't match

The causes tend to repeat:

• Timing differences: one company records the invoice in one month and the other in the next.
• Exchange rates: each company converts the transaction to its own currency at a different rate or date.
• Classification: one side records it as a service and the other as a cost allocation, in accounts that don't correspond.
• Missing entries: one of the companies hasn't recorded the transaction.
• Different systems: each subsidiary runs its own ERP or chart of accounts, and references can't be matched easily.

How to reconcile balances between group companies

The process has three parts. First, each company identifies its balances with each counterparty in the group. Then both sides are matched by counterparty, amount and reference, just as in a bank reconciliation. Finally, each difference is assigned to the company that must correct it and the adjustment is documented.

Common rules help a lot: the same cut-off date for every company, a shared reference on every internal invoice and a reference exchange rate for the period.

An example

The parent company recharges €10,000 of central services to a subsidiary on June 30. The subsidiary receives the invoice on July 3 and records it in July. At the June close, the parent has a €10,000 receivable and the subsidiary has nothing. The reconciliation flags the difference, classifies it as timing, and the subsidiary records the invoice in June so the eliminations agree.

How it relates to other types of reconciliation

Intercompany reconciliation is one of the types of account reconciliation. The underlying technique is the same as in bank reconciliation: match items from two sources and review only the ones that don't fit. That automatic matching technique is what DPI's automated bank reconciliation solution applies.