5 Best Practices for Intercompany Accounting: Applying Standards across the Enterprise Can Help Multinationals Meet Finance, Tax, and Regulatory Requirements, Aiding in the Prevention of Costly Problems
[ILLUSTRATION OMITTED] Increasingly complex multinational value chains, partly the result of industry consolidation or globalization, and more scrutiny from auditors and regulators are causing more and more companies to run into serious and costly intercompany accounting problems. Improper or insufficient intercompany accounting practices are partly to blame. "Multinationals need to treat their internal business with as much rigor and control as they treat their external business," said Kyle Cheney, CPA, a partner in Deloitte s advisory practice who focuses on governance of accounting processes and activities. Best practices can cut through the complexity created by hundreds of thousands of transactions booked across multiple enterprise resource planning (ERP) systems in legal entities worldwide. Global value chains--multinational companies' cross-border trade of inputs and outputs taking place within the companies' networks of affiliates, contractual partners, and arm's-length suppliers-- account for about 80% of global trade, according to the United Nations Conference on Trade and Development's World Investment Report 2013. Intercompany accounting issues aren't limited to large multinationals. "I've seen companies with 10 or fewer legal entities that have major problems," Cheney said. HOW TO PREVENT PROBLEMS To avoid problems and to effectively support new regulatory pressures, Cheney recommended five best practices: Standardize global policies that govern critical areas across the organization Most companies tend to have in place one or two pages of very high-level policies for intercompany accounting. Those policies lack the detail and depth to specify the type of coding necessary to coordinate ERP systems around the world. One critical area that standardized global policies should address is data management. This allows for intercompany transactions to be easily identified and dealt with across platforms with common charts of accounts. Integrated reporting capabilities that meet tax, statutory, and finance requirements should support the integrated transaction flow. This, along with offering dashboard visibility, demonstrates customized performance metrics that require minimal manual intervention. To isolate intercompany transactions for elimination and reporting, trading partner data should be clearly identified and controlled. A standardized global transfer-pricing policy should clearly state how a company achieves proper arm's-length transaction pricing worldwide. The tax and finance functions should be working closely in this area critical to intercompany accounting, using integrated transaction-level pricing and analytics. The IRS and most developed countries require that transactions between related parties occur at "an arm's-length price"--that is, the same price at which unrelated parties would transact. A standardized global transfer-pricing policy should clearly state how a company has satisfied the arm's-length pricing standard, said Todd Izzo, a Deloitte partner specializing in international tax. Perceived abuse in this area inspired the Organisation for Economic Co-operation and Development's recent base erosion and profit shifting (BEPS) initiative, which has focused increased attention on these cross-border pricing rules. As a result, in some instances, the substantive determination of an arm's-length price has been altered, and companies are now required to increase their disclosure of intercompany transactions and financial results. The IRS recendy released final regulations adopting the BEPS recommendation of country-by-country reporting requirements for multinational groups with greater than $850 million of annual revenue (see T.D. 9773). The country-by-country rules require the annual disclosure of related-party and unrelated revenue, earnings, people, capital, earnings, and taxes paid for entities within each tax jurisdiction of residence. …