Intercompany Transactions: More Than Just Year-End Journals

Intercompany transactions often arise when working with UK subsidiaries of international groups.

For many UK subsidiaries, these transactions are part of day-to-day business and can take many forms such as:

• Management costs recharged from parent company to UK subsidiary
• One group company settling an invoice on behalf of another
• Intercompany loans
• Payroll and staff cost recharges

Whilst these are common transactions, these can quickly become the biggest areas of discussion during the preparation of the year end accounts and audit.

Reliance on the Past

The way intercompany transactions are calculated and recorded often develop over time. The transactions are simply booked into the accounting records, group charges appear, and intercompany balances often build up. These transactions are often challenged less internally, because it has always operated that way. However, UK subsidiaries should consider how they can explain these when auditors ask – how was that charge calculated?

Documentation is Key

As any finance team who has been through an audit will know – documentation is always key. In fact, we often are quoted saying in our own audit approach ‘documentation – or it didn’t happen!’

If costs are being recharged to the UK subsidiary, it should be clear what those costs relate to, and how the recharge has been calculated.

If there is an intercompany loan, there should be evidence that this reconciles within the group, the purpose of the balance, and whether any formal loan agreement exists. Accountants will also need to know whether the loan is repayable on demand, and if any interest is charged. If there is a formal loan agreement in place, this is great evidence.

Our top tip would be to consider obtaining this information at year end ready for the audit, this will save much time and be more straightforward than trying to reperform and find evidence later on when the audit takes place.

Materiality

For many UK subsidiaries, intercompany balances and transactions are often some of the largest figures in the financial statements. As such they will often be focused on by auditors and be reviewed in detail. Therefore preparing for this really does set you up well for the audit.

Key Takeaways

Intercompany transactions are not simply year-end adjustments, explained by intercompany agreement. Documenting and reviewing the arrangements in place will help support compliance and reduce delays during the year end process. In our experience, the smoothest audits are often those where intercompany transactions have been considered throughout the year and documented at year end.