Inter-Intra Company Settlement
Inter-Intra Company Settlement
Executive Overview
Across most companies today, the complexity of settling inter-company transactions, both domestic and international, is identified as the single greatest inhibitor of a smooth monthly/quarterly close. Further, as an accounting process, the inter-company settlement has many breakdowns and unnecessary reconciliations. From a total company perspective, inter-company settlements have minimal overall value with no bottom line impact.
The inter-company process involves two types of transactions- shipments of materials and miscellaneous services/charges between company locations. In order for the inter-company process to realize significant operating efficiencies, business practice changes and new operating policies are required. The following outlines the best practice procedure and policies for increased efficiency within the inter-company settlement process:
Material-shipments transactions
- Shipping activity controls the transaction and sets price
- The transfer price should be the receiving location’s standard cost
- Receiving activity will always receive what the shipping activity has identified on the packing slip/BOL as shipped
- Any discrepancies identified by the receiving location must be communicated to the shipping activity for subsequent adjustments
- The receiving activity does not record any adjustments unless the shipping activity has acknowledged and recorded the adjustment
- If possible, the shipping activity records both the sales entry and the in-transit inventory entry for the receiving location
- Upon receipt of materials, the receiving location relieves the in-transit inventory account
- Inter-company miscellaneous service/charge transactions
Billing activity controls transaction
- Customer activity provides documentation in advance, authorizing service/charge
- Customer provides account classification to the billing activity for use on the customers behalf.
- Billing activity records via journal entry or other means both sides of the entry (billing location and customer location)
- Billing activity identifies within journal entry notes feature explanation of charges
- Billing activity forwards detail of charges when applicable to customer location
- Customer location may dispute charges in the subsequent month.
IMPACTS
- Review inter-company settlement proposal with all operating management and get concurrence
- Identify domestic and international legal entities
- Identify intra-company locations
- Define inter-company accounts to be used
- Determine process to record material shipments (this may be different within each legal entity)
- Determine process to record miscellaneous service/charge transactions (this may be different within each legal entity)
- Determine the cash settlement process and frequency for domestic and international
- Determine system enablers
- Provide documentation and training to impacted activities
BENEFITS
- Strictly following the disciplines associated with this process will alleviate breakdowns and reconciliations associated with conventional inter-company settlement practices. Because only balanced transactions are recorded within the process for both material and miscellaneous transactions, there could never be an out of balance condition and the settlement process becomes automatic.
