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Effectively Utilizing Materiality Thresholds in Intercompany Accounting

For a large number of companies, 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 with 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-balances in Intercompany are nothing more than distant memories.

More than improvements in technology, the ability to have all sides of a transaction process within the scope of a Shared Services organization has created opportunities for coordination and efficiency that were not previously possible.  Yet, for many, significant challenges remain for 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 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.

While there may be 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 another, with zero impact on the company as a whole), when employee bonus plans are impacted the reasons for and against materiality limits become increasingly muddled. 

Reviewing some recent iPollingTM results related to this topic, the first question looked at the status at the participating companies in utilizing an amount threshold for intercompany transactions.  The majority (64%) have implemented an amount threshold, with another 5% that are currently evaluating doing so.  Interestingly, 8% of the companies have either approved using the thresholds and had the implementation fail or evaluated their use and decided to not do so.  Also, it was interesting to note that 23% of the surveyed companies have not even evaluated this important practice.

The second poll question then identified the current threshold amount companies utilize for intercompany transactions.  As is well illustrated in the chart below, there is a wide variety of thresholds being used at the companies participating in the research, with the most popular being an amount greater than $1,000 USD at 25% of the companies and a threshold greater than $10,000 USD at 21% of the companies.

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.

Some of the poll comments made by Peeriosity members on this topic include the following:

Manufacturing Member: Our minimum threshold is $500 per line item for general expense items. There is no minimum for the sale/shipment of product that is then resold.

Computers & Electronics Member: While we have issued guidance not to charge back individual transactions less than $1,000, we continue to have entities initiating chargebacks for lesser amounts.

Media & Entertainment Member: Because we currently do not have a threshold this was never identified as an issue and therefore not evaluated.

Consumer Products & Services Member: Our current intercompany billing threshold is $2,000.

Healthcare, Pharmaceuticals, Biotech Member: We have a threshold of $20K for non-trade back-charges. Companies can collect costs and back-charges once above $20K for the fiscal year. However, there are a few exceptions when companies can back-charge lesser amounts.

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

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

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“iPollingTM” 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 MailTM, members can easily communicate at any time with others who participated in iPolling.

Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers.   Membership is for practitioners only, with no consultants or vendors permitted.  To learn more about Peeriosity, click here.



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