Intercompany Reconciliation

Intercompany reconciliation is the process of matching the balances and transactions that companies in the same corporate group record with one another, so that each side's records agree before the group's consolidated accounts are prepared. When one subsidiary sells goods, lends money or charges a fee to another, both entities book the event: one as a receivable or income, the other as a payable or expense. Intercompany reconciliation confirms that the two sides match in amount, currency and timing, and explains any difference.

It is a specialised form of account reconciliation and a required step in the group financial close. Under IFRS 10 and the US GAAP consolidation standard ASC 810, intragroup balances, transactions, income and expenses must be eliminated in full in consolidated financial statements; the eliminations work only if both sides agree. Groups with many entities, such as multinationals, banks and payment companies with a holding company and licensed operating companies in several countries, spend a large share of close time on it.

Imagine two siblings who run separate stalls at the same market and often lend each other stock and cash. Each keeps a notebook. At the end of the month their parent, who owns both stalls, wants to know how the family business did overall. Money the siblings owe each other is just moving between pockets of the same family, so it should be left out.

Before leaving it out, the parent checks that both notebooks agree. If one sibling wrote "lent 100" and the other wrote "borrowed 90", the totals will not cancel neatly. Intercompany reconciliation is that check: making sure both sides of every family deal tell the same story so it can be removed cleanly.

A typical group process runs as follows:

1. Each entity records intercompany transactions in dedicated accounts tagged with the counterparty entity.
2. Before the cut-off, entities confirm open balances with each other, often through a shared platform or the group's ERP.
3. Balances are matched pair by pair (entity A with entity B), in a common currency at the group's closing rate.
4. Differences are investigated and corrected with journal entries in the right entity.
5. Agreed balances are eliminated on consolidation.

The pairwise check is:

where $D_{AB}$ is the difference between what entity A says B owes it and what B says it owes A. It should be zero.

A UK parent invoices its US subsidiary 100,000 US dollars for software services. The parent records a receivable; the subsidiary has received the invoice but recorded only 98,000 dollars because 2,000 dollars of the charge is disputed.

$D_{AB} = 100{,}000 - 98{,}000 = 2{,}000$. Until the dispute is settled and one side adjusts, the elimination leaves 2,000 of receivable and income in the consolidated accounts that does not exist outside the group. Once both sides show 100,000, the consolidation entries debit intercompany income and credit intercompany expense, and debit the intercompany payable and credit the intercompany receivable, each for 100,000, so nothing remains in the group accounts.

• Timing. One entity books an invoice or transfer in the period; the other books it after the cut-off.
• Currency. Entities use different functional currencies and translate at different exchange rates; IAS 21 governs these translations, and mismatches create foreign exchange differences.
• Disputes and missing invoices. Cost recharges are booked by the sender but not accepted by the receiver.
• Tax deductions. A payment net of withholding tax leaves a gap unless the tax is booked on both sides.
• Classification. One side books a loan, the other a trade payable, or amounts go to the wrong counterparty code.

Agreed intercompany balances are settled in cash, and many groups use multilateral netting so that each entity pays or receives one net amount per cycle instead of many gross payments. Groups with a cash pool run by corporate treasury also reconcile pool positions, which are themselves intercompany loans. The prices charged between entities must follow transfer pricing rules based on the OECD arm's length principle, so reconciled intercompany data is also evidence for tax authorities.

Unreconciled intercompany balances are a frequent audit finding and can delay the close, distort the consolidated income statement and balance sheet, and hide cash trapped in particular entities. Larger groups therefore run intercompany matching monthly or continuously, with a central team owning disputes, rather than leaving it to the year-end close.

• IFRS Foundation: IFRS 10 Consolidated Financial Statements
• IFRS Foundation: IAS 21 The Effects of Changes in Foreign Exchange Rates