Elizabeth Milne, Accounting and Financial Close Expert, SAP
Molly Boyle, SAP Solutions Expert, BlackLine
Before we dive into the technology let’s discuss what intercompany accounting is and acknowledge the associated challenges.
Intercompany accounting can be extremely time-consuming, especially during the financial close. Together people and technology can help improve the process. Let’s talk through three steps:
- Defining intercompany reconciliation
- Traditional vs Peer-to-Peer intercompany processes
- SAP solutions for intercompany accounting
Defining intercompany reconciliation
In preparation for creating financial reports, organizations must reconcile transactions that occur between its reporting entities. During the consolidation process, the activity must then be eliminated so as not to overstate consolidated results. Examples of intercompany transactions include: payables/receivables, sales of goods and services, dividends, loans and interest, management fees and cross-charges.
If entity A reports a payable to entity B, then entity B must record a corresponding receivable from entity A. But why, wouldn’t that be done automatically? Each entity manages its own local accounting. Even though SAP does allow for cross-company posting, in many cases customers do not use this capability.
Intercompany complexity
With the frequent changes in the number of entities and subsidiaries from both M&A and organic growth, efficiently reconciling intercompany balances becomes increasingly challenging. Add this to the requirements of tax, reporting, and treasury, and you’ve got a lot of complexity.
Much of the complexity, and often the unreconciled balances between entities, are due to a multitude of factors. Often many teams are involved, including local accounting operations staff and shared services organizations, which makes the process diffuse and limits accountability. Different technologies in play, separate accounting structures, and lack of standard process can all make chasing down unreconciled balances hard, often with little in the way of documentation trail.
It all means the financial close can drag on, or worse, corporate ends up using plugs to paper over unreconciled balances that effectively mask accounting errors and control deficiencies.
Reconciling Intercompany – The Traditional Approach
Traditionally, corporations wait until the close of the month when headquarters will collect all intercompany data and run a reconciliation report that lists all entities intercompany activity. Some organizations have consolidation tools that do this, others rely on spreadsheets. Reconciliations are typically performed at the general ledger (GL) account level or at a summarized intercompany account level.
Once the reconciliation report is compiled, it’s then sent back to the individual entities, who review the report and determine which entities they do not match. Then, they contact the local teams and begin to sort out why they do not agree. The detail must be reviewed to determine why the discrepancies occurred. This involves going back to the transactional systems and pulling invoices to see which transactions do not match. Individuals at each of the entities then contact each other by phone or e-mail and decide who will make the corresponding adjustment to correct the discrepancy.
Adjustments can either be made in the source system requiring consolidation processes to be rerun or they are made as a reversing top-side entry for corporate consolidation purposes. This process is time consuming and requires manual escalation procedures. It also creates a bottleneck resulting in inefficient flow of information.
So how can you get to an efficient intercompany reconciliation process? What can you do to redesign a process that you can stand behind, that clearly shows account balances and variances between the parties (and that all parties agree on), that is underpinned with the detail on both sides of the transaction necessary for confidence?
Intercompany Reconciliation Process – The Peer-To-Peer Approach
This process allows for entities to deal directly with one another in a peer-to-peer fashion. The first key difference is a change in process, with the traditional approach corporate waits until the day of the close (day 0) to run reconciliation reports to identify discrepancies. With a peer-to-peer approach, entities can start reconciling intercompany throughout the period rather than having to wait until period end. This shift in the time line removes the reconciliation process from the close’s critical path.
To facilitate such peer-to-peer interaction, a tool is required for sharing intercompany data. Ideally, such a tool would include the transactional data so that the entities don’t need to go back to the source systems and can review the same information. While a technology solution can make a major impact, people and process are also critical to success.
Benefits of a peer-to-peer process:
- Reliable data – perform large volumes of balance and invoice matching
- Faster reporting cycles – eliminates bottleneck at corporate finance by providing tools to enable business units to resolve differences earlier in the financial close process.
- Greater productivity – resulting in more time for more valuable activities, such as analyzing data and measuring and improving performance
SAP Solutions for Intercompany Accounting
When it comes to the technology aspect of improving intercompany, SAP offers two complementary solutions: SAP S/4HANA and ECC include intercompany reconciliation functionality (ICR) and SAP Intercompany Financial Hub by BlackLine (The Hub). Both solutions can facilitate a peer-to-peer intercompany process as described above.
ICR delivers reconciliation reports (SAP ECC: RFICRC20; SAP S/4HANA: FBICR3) within an instance of an ERP by account, company code and trading partner. You can also load intercompany transactions posted in other ERP systems – SAP or Non-SAP. The trading partner dimension would need to be enabled in the ERP and that dimension would need to be populated on the appropriate intercompany accounts. ICR helps identify intercompany differences. However, once they are identified, accountants need to figure out why. This process can be very manual and time consuming.
The Hub also delivers reconciliation reports and allows collection of intercompany activity from multiple source systems. This is similar to ICR, but as its name suggests, the Hub has additional functionalities to extend well beyond reconciliation to help manage the end to end intercompany process.
The Hub provides a
proactive approach to intercompany transactions, where entities can agree on intercompany activity and requirements
before the data is posted to the ERP. Users can create requests that corresponding entities can either accept or reject. If agreed, they can attach notes and supporting documentation such as contracts, invoices, or other substantiating documents. The Hub can post back to SAP or any disparate system. This proactive approach prevents intercompany out of balances from occurring in the first place and reduces or eliminates out of balance investigations at month-end. The preprocessing of data is usually a manual process managed outside of an ERP system with spreadsheets and share sites. The Hub provides a closed-loop process that integrates with balance sheet reconciliations and can automate required adjustments.
In addition to reporting, the Hub provides enhanced matching capabilities, including the ability to match many data variables and complex relationships like one to many and many-to-many. Matching on multiple dimensions (i.e. segment or profit center), including those outside the ERP is also possible as well as text and descriptions. Configurable fields are not limited to SAP master data and can support BEPS and other intercompany reporting. Robust reporting includes settlement dashboards and facilitates compliance activities and for exception tracking and visibility into settlements.
SAP Intercompany Financial Hub by BlackLine is a business-driven solution, complementing ICR, providing extended auditability, workflow and documentation.
A Blog Series to Answer Your Questions
There are a number of common questions about BlackLine and SAP and how our solutions work together. Please check out these blogs to answer them:
Check out the SAP S/4HANA Finance Reasons to Move on demand webinar series
https://www.sap.com/move-finance
There are specific deep dive session for SAP Solution Extensions by BlackLine
Register for "Establish Trust Across the Financial Close" to gain access to
Create More Efficient, Transparent, Trusted Accounting Processes: SAP Account Substantiation and Automation by BlackLine
Bring Governance and Automation to Your Intercompany Processes: SAP Intercompany Financial Hub by BlackLine
