Intercompany reconciliation is the process of verifying that transactions between entities within the same corporate group are recorded consistently by both parties. Both entities must record the same amount for the same transaction, as any mismatch will cause errors in consolidated financial statements.
In Depth
Intercompany reconciliation is essential for accurate consolidation. When Subsidiary A records a £100K sale to Subsidiary B, Subsidiary B must record a £100K purchase. If either side records a different amount, the consolidation will not eliminate cleanly, resulting in errors in the group accounts.
Common causes of intercompany mismatches include: timing differences (one entity records the transaction in March, the other in April), currency differences (for cross-border transactions, each entity uses a different exchange rate), classification differences (one entity codes it as revenue, the other as a recharge), and simple errors (wrong amounts, missing entries).
The reconciliation process typically involves: each entity reporting its intercompany balances and transactions, comparing corresponding entries across entities, identifying and investigating mismatches, agreeing the correct treatment, posting adjusting entries to resolve differences, and documenting the resolution.
FP&A teams managing multi-entity groups should establish intercompany reconciliation as a mandatory step before consolidation. Unresolved intercompany differences create reconciling items in the consolidated accounts that auditors will question.
For UK groups, intercompany transactions have tax implications — transfer pricing rules apply to ensure transactions are at arm's length, and VAT may apply to intercompany supplies of goods and services.
Real-World Example
A UK group with five entities performs monthly intercompany reconciliation. In March, the reconciliation identifies 8 mismatches totalling £45K. Three are timing differences (£22K — transactions recorded in different months), two are FX translation differences on cross-border transactions (£15K), and three are coding errors (£8K). The FP&A team coordinates with entity accountants to post corrections before consolidation, reducing the month-end consolidation time from 3 days to 1.
Related Terms
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