Cross Charging Intercompany Expenses

Hi Scott,

Also it would help if you could provide a simplified entity structure (as John mentions, is it all in the US or are some entities outside the US?). Also, are all entities on the same accounting system or if there are different ones at each? If all on the same system, much easier and you just do the journal entry by identifying the appropriate entity in the account code. If you have different systems (or even different instances of the same system, like separate sets of QuickBooks), you'll need to coordinate entries to make sure you can still consolidate cleanly. Typically in this latter case, you'll take the charge on one subsidiary's books, offset on those same books in an intercompany clearing account, and then mirror-image this entry on the other subsidiary (or parent) books. If you can provide a little more detail about what you are trying to do, I'm sure John and I can help you out here.

Best,
-Andy

Hi Scott. Both responses above are on point. If you are allocating corporate charges, I would recommend setting up contra-accounts that you can map to a separate line in your consolidation, so that you can monitor that the allocation is eliminating in consolidation. Also, as mentioned above, if you are charging items to entities that keep their books in another currency, that becomes an issue as well, in terms of the P&L items eliminating, and the intercompany balances eliminating after the foreign intercompany balances are translated at the Spot rate.

Having recently worked as the Global CFO of a 40-country company, we employed a monthly Interco reporting and reconciliation process. Yes, literally having the subs complete a form that is sent to Corp every month 'acknowledging' the Interco charges and balances they have recorded to date.

This proved immensely valuable in keeping the Interco accounts balanced... and sane.

As for Intl, be sure to consider what countries require actual, external invoices that must truly be paid/settled in cash in order for them to be recorded on their books. There are some tricky Intl Tax and GAAP hurdles in this area.

John asked a key question - are these interco charges between subs or between parent and sub? If between subs then the other respondents (Andrew, et al) are giving you great advice. If it is between parent and sub (assuming you are allocating parent expenses to subs) then you need to talk with your tax department as you are now getting the attention of local taxing authorities - and you will enter the world of "stewardship expenses".

Thanks for the comments and it is past time I provide some clarification here. We are allocating expenses for global insurance coverage and other expenses that are being paid out of the corportae office to subsidiaries in Australia, Mexico, the Czech Republic, Italy, and a few other countries. We have a holding company in Europe under which the Czech nad Italy operations lie.

Charging insurance expenses incurred by Headquarters on behalf of its affiliates would be governed by transfer pricing tax regulations and is appropriate. Since such insurance expenses would be considered 'pass-through' from the parent company to the affiliates that should really incur the expenses, a markup should not be required as compared to other types of management service fees that should have a profit markup.

Typically, the insurance expense would be allocated on the basis of a reasonable allocation key or index. For example, property insurance could be allocated on the basis of asset values while product liability insurance could arguably be allocated on the basis of sales.

Finally, regarding the regional holding company structure, it is probably more efficient to charge the operating affiliates directly rather than first charging the holding company which would then recharge its operating subs.

I think the other commenators have addressed well some of the accounting issues that arise with booking intercompany expenses and eliminating them in consolidation.

Hope this helps.

Jake