Blackline’s acquisition of FourQ this week for a reported $165m (plus earnout consideration of up to $75 million over the next three years) is a timely reminder that intercompany eliminations are still a big deal – but shouldn’t be!
FSN’s 2021 Agility in Financial Reporting & Close research highlights that only 11% of finance organisations have completely transformed and automated their financial reporting process over the last 3 years and 46% of CFOs consider that intercompany eliminations carry a medium or high risk of material misstatement.
Furthermore, 78% finance organisations say that resolving intercompany reconciliations delays the close process with 21% conceding that it causes major delays.
Clearly the process of inter-company elimination is a common and widespread hindrance to an efficient close. So why do companies make such a hash of it?
- Essentially, inter-company reconciliation is a collaborative process requiring the counterparties to have full visibility of their corresponding balances, the difference between them and the underlying transactions. However, the counterparties in an intra-group trade can be thousands of miles apart and without a suitable communication infrastructure that gives each of the trading entities shared access to a common view of their inter-company positions it is difficult and time consuming to resolve any differences. In the absence of suitable systems support many companies are compelled to resort to email exchanges and telephone calls.
- Material differences often only come to light after all of the individual group reporting packs have been submitted and the consolidation system attempts to automatically eliminate the inter-company balances for the first time. Typically, this is quite late in the close process when time is pressing and consideration needs to be given to other matters. In these circumstances it is tempting to simply accept any differences and postpone a full reconciliation for yet another period.
So what can be done about it?
- The key to minimising delays around the agreement of inter-company differences is to start the procedure much earlier
- Use the best tools for the job. You need complete visibility of the process and spreadsheets just don’t cut it!
- Modern intercompany applications, (such as CCH Tagetik, Board International, Blackline, Trintech, Prophix and some newer players, such as Vena and Konsolidator to name but a few), play a vital role in ensuring an effective process. They handle the eliminations automatically, highlighting the mismatch between entities in both local currency and reporting currency for ease of traceability. Secondly, cloud-based technology allows each connected user to view their differences in real-time, some, even at an invoice level.
Solving the inter-company issue should no longer be a major challenge. Leaving your company exposed to material misstatements and compliance failures, could be.
By Gary Simon, BSc, FCA, FBCS, CITP
Chief Executive of FSN & Leader of the Modern Finance Forum on LinkedIn