Intercompany Reconciliation: Clear Group Balances Before Year End

If your business runs more than one company, say a Doha trading arm, a Dubai sales office and an Indian back office, the balances between them need to agree before year end. When they don't, consolidation drags, auditors ask questions and your tax filings can tell different stories in different countries. A short monthly intercompany reconciliation fixes most of this.

Why intercompany balances go wrong

Every intercompany transaction has two sides. The Qatar company books a receivable, and the Indian company should book the matching payable for the same amount, in the same period. In practice, the two sides drift apart.

The usual causes are simple. One company books the invoice in November and the other in December. The two sides use different exchange rates. Someone posts the entry to the wrong account or entity code. Or one side is missing altogether. AccountsIQ's guide to intercompany accounting lists the same culprits: timing, FX, inconsistent coding and missing or incorrect entries.

None of these is serious on its own. The trouble is that they pile up over twelve months and land on your desk in January, when the audit team wants answers.

What the rules expect

If your group prepares consolidated accounts under IFRS, IFRS 10 requires you to "eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows" (paragraph B86, as quoted in this IFRS Foundation staff paper). You can only eliminate cleanly if both sides agree. Any difference has to be explained and fixed first.

Each company's own accounts also matter. Under IAS 24, a parent, subsidiary or fellow subsidiary is a related party, and the entity must disclose the nature of the relationship and information about the transactions and outstanding balances. If the two companies disclose different balances with each other, an auditor will spot it.

Tax adds a third layer, because the same intercompany numbers feed into transfer pricing filings.

What this means for your business

Qatar. Qatar's transfer pricing rules ask companies with related-party transactions to file a transfer pricing declaration when annual revenue or assets are QAR 10 million or more, and a master file and local file at QAR 50 million or more (Crowe; KPMG Qatar). KPMG notes that the master and local file thresholds apply where the entity has a related party outside Qatar. Those filings start from your intercompany ledger, so a clean reconciliation saves real time.

India. An Indian company with an international transaction with an associated enterprise needs Form 3CEB, a chartered accountant's report under Section 92E of the Income-tax Act, 1961. For international transactions there is no minimum amount (Computax). Due dates can be extended, so check this year's date with your adviser.

Across the GCC and India. If your Indian company reports a service fee to its Qatar parent of one figure and the Qatar company records another, you have a problem in two jurisdictions at once. The fix is not clever tax planning. It is making sure both sides agree, every month.

For example, a Doha trading company with a Mumbai support office might find a QAR 40,000 gap at year end. After a day of digging, it turns out to be two months of service invoices booked in different periods plus an exchange rate mismatch. Caught monthly, each item would have taken ten minutes.

A monthly intercompany routine

Here is a routine most SME groups can run in a day each month:

• Keep one intercompany register. List every company pair, the account codes each side uses and who owns the balance. Use dedicated intercompany accounts, never general receivables or payables.
• Set one cut-off date. Agree that the invoicing company books first and the receiving company books in the same month, using the invoice date.
• Agree one exchange rate. Pick a single source and rate for month-end revaluation across the group, and write it down.
• Confirm balances both ways. By working day three, each company sends its balance with every other company. Compare them side by side, in the transaction currency as well as the reporting currency.
• Explain every difference. Label each one as timing, FX, coding or missing entry, and fix it in the current month. Don't carry unexplained gaps forward.
• Settle regularly. Net off and pay intercompany balances on a set schedule, say quarterly, so they don't grow into large, old amounts.
• Keep the paperwork. Hold intercompany agreements, invoices and settlement records in one place. Your auditors and your transfer pricing adviser will both ask for them.
• Check with your adviser. Confirm your transfer pricing filing obligations in each country before year end.

If you want help keeping on top of this, NexCFO's bank reconciliation, MIS reporting and compliance calendars can carry part of the monthly routine for you.

Two balances that agree every month make for a much calmer January.