How do you present unresolved intercompany variances (receivables, payables, revenue, cost) in the consolidated FS?
Intercompany Variances in Balance Sheet and P&L
Answers
Can you be more specific, since your consolidated FS have gone through eliminations. Variances should reflect a consolidated budget so the explanations should be a culmination of the separate issues of all the subsidiaries.
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Entity A recorded $500 as payable to Entity B while Entity B recorded $450 receivable from Entity A. At consolidation, the variance is unresolved and so no adjustments were made in either books. This means that I cannot eliminate because interco receivable and interco payable do not match.
Question: Why did "A" send $500 and "B" record $450?
"B" needs to account for the $50 in the intercompany. Could it be FX loss?
The object with intercompany is that the two accounts are always in balance. So each month you should reconcile intercompany and make sure all the transactions recorded in parent appear in the sub, with the same accounts (adj for currency, if applicable).
Also all transactions in sub need to appear in parent (same for currencies). If they don't balance, just in your bank accounts, you have an issue that needs to be researched and corrected.
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As Wayne has pointed out, there is a deeper problem than presentation. Your reconciliation. There should not be any difference and should always be in balance.
Having said that, if it cannot be helped, my recommendation would be to create an account to reflect the unresolved difference.......say.."Unreconciled Intercompany" . This should act like a Suspense account. This account should NOT be used as first option to put the intercompany account in balance but to reflect the difference and needs to be RESOLVED asap.
If you are aware what the correct entry is in Entity B then I would adjust the interco balance on consolidation until the variance is resolved. e.g.
Dr Interco Receivable $50
Cr Interco Income $50
This would enable you to eliminate the intercompany P&L transactions also.
If the correction occurs in entity B's accounts in a subsequent period you may need a further consolidation adjustment at that time.
For most intercompany reconciliation differences that arise from merchandise transactions (i.e., affiliate A invoices goods to affiliate B), the difference should go into inventory. That's because A reduced its inventory upon invoicing but B didn't record the inventory yet, so Intercompany Accounts Not Reconciled is an Inventory sub account on the consolidated books. Make sense? As Wayne mentioned, differences can also arise due to exchange rates, so there also has to be a system to communicate the month end exchange rates to be used by every affiliate to avoid those exchange differences.
Of course, if there was time for communications by systems or people about intercompany transactions that "miss the boat", typically near month-end, such reconciliation differences wouldn't arise. Large companies do have such systems but you might search online for small-company oriented systems.
We run into issues like this periodically and it is usually a data entry error. The review and reconciliation of all the inter-company accounts is part of our month end process. If they are out of balance, we do not issue financial statements. Since we have a strict, commissioned deadline of the 8th for financials, our staff researches the variances quickly and they try to be proactive to prevent hiccups in the future. We are a small company and its easy to see both sides of the transactions, which makes this practical.