Chapter 7:

NetSuite Intercompany Reconciliation

August 29, 2022
14 min

Intercompany transactions are common for companies with one or more subsidiaries, and intercompany accounts are added to the chart of accounts to record these kinds of transactions. They are general ledger accounts used to record financial transactions between two or more subsidiaries within the same company, such as intercompany payments, loans, and fund transfers. In NetSuite, an account that can be used for intercompany transactions must have the "Eliminate Intercompany Transactions" and “Include Children” options enabled. 

A user can post both intercompany and non-intercompany transactions. However, intercompany accounts receivable and payable are used only for recording purposes, as these transactions are usually eliminated before the period closes. 

Sample accounts where the “Eliminate Intercompany Transactions” and “Include Children” options are enabled.

How Intercompany Transactions Work

Intercompany transactions occur when one subsidiary is involved in a transaction with another subsidiary. An example is when subsidiary A sells a service to subsidiary B; the general ledger will record A as the receivable account and B as the payable account. 

An intercompany transaction between two subsidiaries

Reconciling intercompany transactions reduces the likelihood of inaccuracies in the company's financial statements and is also part of the year-end closing process. It ensures that the company’s book balance and bank accounts are matched. Intercompany reconciliation can be more challenging than reconciling other types of transactions as disputes often arise between the subsidiaries. A dispute occurs when any of these occurs: 

  • One subsidiary questions the correctness of the transaction
  • There’s a discrepancy in the exchange rates
  • The transactions are posted in different accounting periods
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Executive Summary

Intercompany reconciliation is the process of reconciling transactions between two or more subsidiaries within the same company. The intercompany reconciliation report in NetSuite enables users to identify intercompany transactions that are unmatched or incorrectly matched. It includes transactions that have not been paired with a transaction in another subsidiary and transactions that have been paired but have different amounts or currencies. 

The table below shows the Netsuite features used to manage and reconcile intercompany transactions.

This table shows the account types that can be used for intercompany transactions.

The table below shows the five sections of the Intercompany Reconciliation Report that list common causes of intercompany transaction mismatches.

Intercompany Features in Netsuite

These features help users run smooth intercompany reconciliations and avoid manual reconciliations. 

Automated Intercompany Management

This feature allows users to automatically generate journal entries for elimination based on the intercompany transaction lines and intercompany journal lines that are marked to be eliminated. NetSuite will evaluate the activity in the intercompany account and then create journal entries to eliminate artificial profit and loss amounts. 

This feature involves the following activities:

  • Creation of an intercompany purchase order for each subsidiary
  • Generation of intercompany sales orders from the created intercompany purchase orders
  • Managing the transfer of inventories between subsidiaries
  • Creation of journal entries for other intercompany transactions
  • Reconciliation of intercompany transactions with the use of the intercompany reconciliation report
  • Running intercompany elimination from the Period Close Checklist
  • Reviewing the Intercompany Elimination Report

If this feature is not enabled, the user must manually track all intercompany transactions and manually create and post journal entries for elimination. 

Intercompany Elimination

This is the last task in the Period Close Checklist. When a user runs intercompany elimination, NetSuite will create elimination journal entries for all intercompany transaction journal lines that have the “Eliminate Intercompany Transactions" box checked or enabled. NetSuite will also create reversal entries for all intercompany journal lines that are posted to intercompany receivable and payable accounts. The parent company has to complete this process when preparing the consolidated financial statement by removing the transactions between subsidiaries and ensuring that only third-party transactions are represented in the statement. 

To run intercompany elimination, go to Setup > Accounting > Manage Accounting Period. Open the Period Close Checklist and select Eliminate Intercompany Transactions. Click the Run Intercompany Elimination button. Select the Class, Department, and Location, and then click Save. Once the submission status is complete, click on Mark Task Complete

Period close checklist
How to Run Intercompany Eliminations

Intercompany Framework

The Intercompany Framework has a variety of components that help users manage intercompany workflows. However, to use this feature, there should be at least two existing subsidiaries, and the following elements must be enabled: 

  • Accounting, A/R, A/P, and Accounting Periods: These features are located in the Accounting subtab under the Basic Features section.
  • Intercompany Framework and Automated Intercompany Management
  • Intercompany Cross-Subsidiary Fulfillment
  • Multiple Currencies
  • Multiple Calendars
  • Multi-Subsidiary Customers
  • Multi-Book Accounting
  • Classes, Departments, and Locations
  • Currency Exchange Rate Types

The Intercompany Framework includes the following: 

  • Intercompany Cross-Charges: This functionality generates cross-charges between subsidiaries that provide business services for each other, such as when one subsidiary creates a sales order that another subsidiary fulfills. NetSuite will automatically generate one transaction for the selling subsidiary (intercompany receivable) and another for the buying subsidiary (intercompany payables). These cross-charge pairs are automatically approved as read-only intercompany transactions. To generate cross charges, go to Transactions > Financial > Manage Intercompany Cross Charges.
  • Intercompany Netting: This functionality allows users to settle mutual intercompany open balances across subsidiaries. It automatically generates settlements that reduce inaccuracies made through manually generated settlements. It reduces the number of open intercompany transactions, which helps lessen the manual effort spent in reconciling and eliminating open intercompany balances. It also reduces exposure to foreign exchange rates.

An example of intercompany netting where both subsidiaries owe each other but, instead of paying in full, the transactions are settled by offsetting the Accounts Payable and Accounts Receivable to determine the net amount due or payable.

Account Types of Intercompany Transactions

Most types of accounts can be used for intercompany transactions, but the rules vary according to the account type. The following is information about the differences in intercompany transactions for various account types.

Accounts Receivable and Accounts Payable

Transactions posted to these accounts are eliminated during the period close process. It is necessary to create a separate AP/AR account because once Eliminate Intercompany Transactions has been enabled, it cannot be disabled, and the account can be used only for intercompany transactions. However, if the existing AP/AR account has balances from non-intercompany transactions, it cannot be converted to an intercompany account. 

For AP and AR intercompany accounts, eliminations are automatically reversed in the following period. It is also required to revalue the foreign currency to determine whether the transaction has realized a gain or loss due to changes in exchange rates. 

Equity, Income Statement, and Inventory Accounts

Transactions posted to these accounts can either be intercompany or non-intercompany transactions, as they are not exclusive to intercompany transactions only and can be candidates for elimination. 

Balance Sheet Accounts

Transactions posted to these accounts are also eligible for elimination and are not exclusive to intercompany transactions. When the Advanced Revenue Management and Automated Intercompany Management features are enabled, the Eliminate Intercompany Transactions box on the system's deferred revenue and unbilled receivable accounts is automatically enabled. Users who use the Revenue Recognition and Revenue Commitment features on these accounts must manually enable or check the box. The user can disable the feature by unchecking the box if there are no intercompany transactions. 

Summary of Account Type Characteristics

The following table summarizes the account categories and types described in this section.

Intercompany Reconciliation Report

The Intercompany Reconciliation report is used to identify unmatched or incorrectly matched transactions in NetSuite. Users can run the Intercompany Reconciliation report for any accounting book enabled for consolidation if the Multi-Book accounting feature is also enabled. To view the intercompany reconciliation report, go to Reports > Financial > Intercompany Reconciliation

How to open an intercompany reconciliation report

NetSuite scans all transactions submitted for intercompany customers and vendors to generate this report, which includes:

  • Purchase orders and sales orders
  • Item fulfilments and item receipts
  • Vendor bills and invoices
  • Vendor return authorizations and return authorizations
  • Vendor credits and credit memos
  • Customers' payments and vendor payments

The Intercompany Reconciliation Report consists of five sections that show the common causes of a mismatch in the intercompany transaction. 

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Limitations

The following list outlines the restrictions placed on Netsuite operation:

  1. If an existing account is converted to an intercompany account, the existing transactions need to be edited because they are not automatically included for elimination.
  2. Intercompany elimination can be run only from the Period Close Checklist.
  3. Only matched and linked intercompany transactions with the same amounts on the payable and receivable sides of the general ledger are supported by intercompany netting.
  4. Zero intercompany payments are not supported. Accounts payable and  receivable cannot be settled if there is no mutual balance between the two businesses. For instance, users won't be able to use intercompany netting if they have a vendor bill and a vendor credit but no accounts receivable transaction.
  5. Intercompany Vendor Credit and Intercompany Credit Memo: These transactions are linked by the purchase and sales orders they are associated with. They must be matched with intercompany entities in the same amount using only one vendor credit and one credit memo.

Best Practices

This section includes a list of best practices that users should implement for seamless intercompany reconciliation.

  1. Create a separate account for intercompany accounts receivable and intercompany accounts payable. The existing A/P and A/R accounts have  accumulated balances from non-intercompany transactions that cannot be combined with the intercompany transactions that are subject to elimination. 
  2. Run the Intercompany Reconciliation report first before running the Intercompany Elimination to identify and correct any problems associated with the intercompany transaction.
  3. Run the Intercompany Reconciliation report regularly to catch problems with transactions before the month-end process.
  4. Intercompany transactions should be booked as soon as possible to reduce mismatched items in the intercompany reconciliation report.
  5. When using Intercompany Netting, use the Suggest Netting option found in the Netting Workbench so NetSuite will automatically apply and select nettable transactions. 
  6. Keep a centralized record of all reconciled intercompany data and documentation.

Conclusion

This section includes a list of best practices that users should implement for seamless intercompany reconciliation.

  1. Create a separate account for intercompany accounts receivable and intercompany accounts payable. The existing A/P and A/R accounts have  accumulated balances from non-intercompany transactions that cannot be combined with the intercompany transactions that are subject to elimination. 
  2. Run the Intercompany Reconciliation report first before running the Intercompany Elimination to identify and correct any problems associated with the intercompany transaction.
  3. Run the Intercompany Reconciliation report regularly to catch problems with transactions before the month-end process.
  4. Intercompany transactions should be booked as soon as possible to reduce mismatched items in the intercompany reconciliation report.
  5. When using Intercompany Netting, use the Suggest Netting option found in the Netting Workbench so NetSuite will automatically apply and select nettable transactions. 
  6. Keep a centralized record of all reconciled intercompany data and documentation.

Conclusion

Intercompany transactions must be reconciled because they affect the accuracy of financial statements. Users should utilize the intercompany reconciliation reports to address any problems as soon as possible. Failure to reconcile transactions on a regular basis may result in time constraints at the end of the month, and disputes may not be resolved in a timely manner.

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