For many, Intercompany Accounting processes have improved dramatically over the past decade, with the introduction of large-scale accounting systems capable of booking all sides of a transaction for business units within the same legal entity, in multiple currencies, with highly automated processes for any remaining Intercompany Accounting transactions required for legal and tax purposes.  For many, the days of embarrassing large out-of-balance in Intercompany are distant memories.

More than improvements in technology, the ability to have all sides of a transaction processed within the scope of a single global Shared Services organization has created opportunities for coordination and efficiency that were not previously possible.   Yet, for many, significant challenges remain in streamlining processes for miscellaneous billings and charges between entities.  For example, if a company has over $5B in annual revenue, is it really a good idea to create intercompany transactions to bill the cost of a pizza lunch between the home locations of participating employees?  What about the added complexity of getting approvals, and the inevitable bill-back that shows up next month to correct for the employee who only had a salad? While the example may seem extreme, the truth is that many companies continue to wade in the mire of unnecessary Intercompany transactions.

Recently, a Peeriosity member in the General Accounting (R2R) research area performed custom research using iPolling¹ to ask the question, “What is the status at your company of utilizing an amount threshold for Intercompany transactions?”, with the follow-up question, “What is your company’s threshold?”    The results suggest an “either you like the idea or you don’t” approach with 58% having implemented thresholds, and 30% who haven’t even considered the idea.

When you look at results from the follow-up question, “What is your company’s threshold?”, there are also strong opinions at either end of the range, with 27% having a threshold greater than USD $10,000 and 27% who either have no threshold or one that is $100 or less.

Comments from iPoll participants provide some additional insight into the issue.  While there may be a consensus that, from a materiality standpoint, a very high threshold for miscellaneous charges is the right choice (after all, there isn’t any value-add to creating, processing, approving, and correcting transactions where the sole purpose is to shift dollars from one business unit to the another, with zero impact on the company as a whole) when employee bonus plans have impacted the reasons for and against materiality limits become increasing muddled.  Here are some of the comments:

• We process all intercompany transactions and haven’t evaluated the pros and cons of having a threshold.
• We set a threshold of $500 for intercompany billing not related to materials or assets, but have found it difficult to enforce primarily because individual operating units are measured on their P&L performance, so there is a lot of attention on expenses, even if the dollar amounts are small. To reduce much of the volume we recently implemented a “flat rate fee” for employees hosted by a site, who don’t directly support the site (e.g., corporate folks stationed in an operating location who support multiple locations) so that we can eliminate separate expense item billings things like office space, electricity allocation, phone bill, etc.
• While we understand there is no impact on the company if we ignore individual intercompany charges, how do you handle the department manager who doesn’t want to spend money from their department budget to support other departments when they can’t bill out the charges?
• Our threshold is USD $5,000, however, we allow any transaction of inventory at any level, regardless of the dollar amount.
• We also have a USD $5,000 limit, with no limit on intercompany product shipments.
• Establishing a threshold has significantly reduced the volume of intercompany recharges with no effect on business decision-making.
• Intercompany materiality limits were first implemented in July 2013.  The materiality threshold is $100,000 and mainly applies to manual charges for services that are not covered by the intercompany contracts.

The second comment regarding a “flat fee” rather than a complicated process of allocating a myriad of minor charges might be a best practice, although there is also the risk that simplifying how small-dollar intercompany charges are determined doesn’t do enough to correct the underlying issue.

While there are well-intentioned motivations for generating financially immaterial intercompany billings, including P&L-based incentive plans, or principles of full accountability and cost transparency, it can be argued that upon closer inspection the net results are often transaction and analysis costs that greatly exceed any value generated. Analyzing the volume of miscellaneous intercompany billings, and estimating the cost for the activity, is an important first step.

Does your company have a threshold for miscellaneous intercompany billings, and do you have a clear understanding of the pros and cons of making a change?

Who are your peers and how are you collaborating with them?

¹ “iPolling” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer Mail^TM, members can easily communicate at any time with others who participated in the iPoll.