🔗 F&A Process Guide

Intercompany & Compliance — Complete Guide

Intercompany accounting and compliance are the hidden complexity of multinational finance. Get these wrong and your consolidated financials are wrong. Get them right and you unlock tax efficiency, regulatory confidence, and audit-ready books.

▶ Start: What is Intercompany Accounting?

Intercompany (IC) transactions occur between legal entities within the same group — a parent company and its subsidiaries, or between two sister companies. They must be eliminated during consolidation to avoid double-counting revenue, expenses, assets, and liabilities.

• Common IC transactions: Intercompany sales, loans, management fees, royalties, shared services charges, dividends
• IC Matching: Entity A’s IC receivable must equal Entity B’s IC payable — mismatches cause consolidation errors
• IC Netting: Offset IC payables and receivables within the group to reduce bank transaction volumes and FX exposure

🔷 IC Transactions & Netting

• IC Sales: Entity A sells goods to Entity B at transfer price — B records as purchase; A records as sale
• IC Loans: Parent lends to subsidiary — interest must be at arm’s length rate; both sides must accrue interest monthly
• Management Fees: Headquarters charges subsidiaries for shared services (IT, HR, Finance) — must have a signed service agreement and cost allocation methodology
• IC Netting Process: All IC balances reported to Treasury by Day 3 → net positions calculated → single net payment settles all
• IC Calendar: All IC invoices must be raised and agreed by Day 5 of month-end to enable timely reconciliation

🔷 Elimination Entries

• 📋 Eliminate IC Revenue & Cost: Dr. IC Revenue (A) | Cr. IC Purchase (B) — removes double-counting from group P&L
• 📋 Eliminate IC Receivable & Payable: Dr. IC Payable | Cr. IC Receivable — cleans up group balance sheet
• 📋 Eliminate Unrealised Profit: If A sells goods to B with 20% margin and B still holds stock — eliminate the 20% unrealised profit
• 📋 Eliminate Investment in Subsidiary: Dr. Share Capital (Subsidiary) | Cr. Investment in Subsidiary (Parent) — at consolidation
• Tools: SAP BPC, Oracle HFM, Tagetik, Hyperion handle eliminations automatically if IC data is clean

🔷 Transfer Pricing Basics

Transfer pricing (TP) determines the price at which related entities transact. Tax authorities demand these are set at “arm’s length” — what unrelated parties would charge each other — to prevent profit shifting to low-tax jurisdictions.

• TP Methods: CUP (Comparable Uncontrolled Price), TNMM (Transactional Net Margin Method — most common), Cost Plus, Resale Price
• TP Documentation: Master File (group) + Local File (entity) + Country-by-Country Report (CbCR) for revenue >₹5,500 Cr
• Advance Pricing Agreement (APA): Pre-agree TP methodology with tax authority for 5 years — eliminates uncertainty
• Penalty Risk: If IC price differs from arm’s length by >3%, penalty of 2% of transaction value applies in India

🔷 Statutory Compliance (GST, TDS)

• GST Compliance Calendar: GSTR-1 (11th), GSTR-3B (20th), Annual Return GSTR-9 (31st Dec) — never miss
• TDS Compliance: Deduct TDS on applicable payments, deposit by 7th of next month, file TDS returns quarterly
• Advance Tax: Pay in 4 instalments (15 Jun, 15 Sep, 15 Dec, 15 Mar) to avoid interest under Section 234B/C
• ROC Filings: Annual Return (MGT-7), Financial Statements (AOC-4) — file within 60 days of AGM
• FEMA Compliance: External Commercial Borrowings, FDI reporting, ODI returns — for companies with cross-border transactions

✅ End: Internal Controls & SOX

• SOX (Sarbanes-Oxley): US law requiring listed companies to document and test internal controls over financial reporting (ICFR) annually
• Key Control Types: Preventive (block errors before they occur) vs Detective (identify errors after they occur)
• Control Examples: Dual approval for payments; system access controls; reconciliation sign-off; segregation of duties (SoD)
• SoD: The person who creates a vendor cannot also approve a payment — separate roles prevent fraud
• ICFR in India: Companies Act 2013 Section 143(3)(i) requires auditors to comment on adequacy of ICFR for all listed companies
• Risk & Control Matrix (RCM): Document each risk, its control, control owner, testing frequency, and evidence