Why intercompany breaks so often
Intercompany activity is recorded twice, by two entities, often by two different people, sometimes in two currencies and two systems. Any difference in timing, amount, account or rate shows up as a break at consolidation. In PE buy-and-build groups the problem grows with every add-on acquisition: new entities, new charts of accounts, new management fee and cost allocation flows.
The four kinds of intercompany activity
| Type | Example | Typical accounts |
|---|---|---|
| Trading | Entity A sells goods to Entity B | Intercompany revenue / COGS; AR / AP |
| Services and management fees | Parent charges subsidiaries a monthly management fee | Fee income / expense; receivable / payable |
| Funding | Parent lends cash to a subsidiary | Intercompany loan receivable / payable; interest |
| Cost allocations | Shared software and payroll recharged to entities | Recharge income / expense |
The intercompany reconciliation process
Step 1: Agree the rules before month-end
Write down, once:
- Which accounts hold intercompany balances (one pair of accounts per counterparty is easiest).
- Which entity initiates each type of transaction, and the cut-off day.
- The FX rate source and date for each type.
- The tolerance for timing differences.
Step 2: Record both sides in the same period
The initiating entity books the transaction and sends the details; the counterparty books the mirror entry in the same period. Many groups set "no intercompany after BD1" so both sides are complete before reconciliation.
Step 3: Pull balances by entity pair
For every pair (A↔B, A↔C, B↔C…) list each side's balance at period-end in the transaction currency and the reporting currency.
| Pair | A's receivable from B | B's payable to A | Difference |
|---|---|---|---|
| A ↔ B | $250,000.00 | $250,000.00 | $0.00 |
| A ↔ C | $118,400.00 | $112,900.00 | $5,500.00 |
| B ↔ C | $40,000.00 | $40,000.00 | $0.00 |
Step 4: Investigate and clear differences at the source
For A↔C above, the $5,500 difference turns out to be a cost recharge A booked on 30 October that C booked on 2 November. C books the accrual in October. Fix the entity that's wrong; don't plug the difference in consolidation.
Step 5: Eliminate
Once every pair agrees, eliminate intercompany balances and transactions in consolidation. Eliminations should net to zero; if they don't, a pair wasn't actually reconciled.
Step 6: Review and sign
The controller reviews each pair's reconciliation and the elimination entries, with the evidence attached.
FX: the most common hidden break
When entities report in different currencies, the same balance can differ purely because each side translated it at a different rate or date.
Example: A (USD) lends B (EUR) €100,000. A records $108,000 at 1.08. At month-end, B's payable translates at 1.10 to $110,000 in group currency, while A still carries $108,000. The $2,000 is an FX difference, not an error. It needs a consistent revaluation policy, not a manual fix.
Rule: agree balances in the transaction currency first, then handle translation separately.
Common causes of intercompany breaks
- Timing: one side books in the next period.
- Account mismatch: one side books to a third-party account instead of intercompany.
- Amount: different invoice amounts, tax treatment or partial payments.
- FX: different rates or dates.
- Missing counterparty: a transaction booked without identifying the counterparty entity.
- New entities: an add-on acquisition's intercompany accounts not yet mapped.
Making intercompany faster
- One intercompany account pair per counterparty.
- A monthly netting and settlement cycle so balances don't grow forever.
- An intercompany agreement for recurring fees and allocations, with the calculation attached.
- Reconcile weekly in large groups; monthly at minimum.
- Track open differences by age and owner, like any reconciling item.