challenges facing intercompany...

Trust is in the Balance™ 1

CHALLENGES FACING INTERCOMPANY OPERATIONS

Digital Finance Transformation Series


AGENDA

• Welcome & Introductions

• Cleaning Up Intercompany Accounting: Driving Efficiency While

Managing Risk

• Tom Toppen, Deloitte

• Understanding Intercompany Regulations & Challenges

• Susan Parcells, BlackLine

• Q&A


Tom Toppen Managing

Director

Susan Parcells Senior Director of

Finance Transformation

Zach Deming Director

Product Marketing

PRESENTERS


INTERCOMPANY RESOURCES

Cleaning up intercompany accounting: Driving efficiency while managing risk

Deloitte Advisory – Accounting & Reporting Transformation

Copyright © 2017 Deloitte Development LLC. All rights reserved. 6

• What is Intercompany Accounting (ICA)?

• ICA – the costs of non-compliance

• Challenges to achieving effective ICA

• A shared responsibility – Accounting, Tax, and Treasury

• A vision for a successful ICA program

• Questions

Agenda

What is Intercompany Accounting (ICA)?


What is Intercompany Accounting (ICA)?

• Recording and reporting of internal financial activities

• One legal entity doing business with another

• Often crosses international borders and currencies

• Can include sales of products and services, fee

sharing, cost allocations, royalties, and financing

activities

• Associated risks make ICA not just an accounting issue


The costs associated with non-compliance can be significant

A manufacturing company faces a federal grand-jury investigation involving intercompany cash transfers related to its tax planning.

An insurance company is forced to restate financial results stemming from its failure to eliminate certain intercompany transactions related to variable-interest entities.

A company’s weak internal controls over its related-party transactions allows insiders to fraudulently overstate inventory, leading not only to Securities and Exchange Commission-imposed fines but to two lawsuits.

An oil company’s improper intercompany accounting results in a restatement of its financial statements and a subsequent lawsuit accusing it of misleading investors about the effectiveness of its internal controls.

An offshore drilling company is levied $8 million in fines and penalties due to untimely and incomplete filings of audited financial statements in a foreign jurisdiction.


Challenges to achieving effective ICA

Legal

Entities

• Expanding global footprints

• Integrated supply chains

• Increased volume of activity

• Disparate systems

• Complex intercompany agreements

• Transfer pricing compliance

• Local statutory reporting

• Intercompany settlement

• Foreign exchange (FX) exposure

• US and international tax regulatory

trends

C

A shared responsibility Accounting, Tax, Treasury


Which do you believe poses the greatest challenge to your organization’s implementation of intercompany accounting?

22.4% Don’t know/not applicable

21.4% 16.8% 16.7% 9.4% 13.3%

Disparate

software systems

Complex

intercompany

agreements

Transfer

pricing

compliance

Foreign exchange

(FX) exposure Intercompany

settlement

Source: Deloitte Dbriefs webcast, “Cleaning up intercompany accounting: Driving efficiency while managing risk,” on May 26, 2016. Poll respondents were largely in accounting (47.2 percent) and finance (22.9 percent) roles.

http://www2.deloitte.com/us/en/pages/dbriefs-webcasts/events/may/2016/dbriefs-cleaning-up-intercompany-accounting-driving-efficiency-while-managing-risk.html?id=us:2sm:3ss:ica:awa:adv:080916:db



Who do you believe has taken the lead in managing your organization’s intercompany accounting?


Combination of

accounting, tax,

treasury

24.4%

Accounting

55.7%

Tax

5.5%

Treasury

2.1%





Accounting, Tax, and Treasury A shared responsibility

Tax

Involve

business

operations

Govern

through a

Center of

Excellence

(COE) Standardize

policies and

procedures

Understand

intercompany

agreements and

strategic rationale for

corporate hierarchy

Treasury

Establish

approvals and

workflows

Accountin

g


Where do you believe your organization stands to benefit the most from a comprehensive intercompany accounting program?

40.3%

3.1%

21.4%

13.2%

5.6%


Financial reporting integrity

A reduction in fines, penalties, or unintended taxable events

A more reliable internal control environment

All of the below

A more efficient month end close and/or statutory reporting process




The ICA Framework


The ICA Framework The seven components of a leading ICA program

Intercompany

pricing

Data

Management

Transaction

management Governance

and policies

Internal

and

external

reporting

Reconciliation

and

elimination

Netting

and

settlement

Intercompany

Accounting

Framework

A vision for success


World-Class ICA Vision

Bu

sin

es

s

Reportin

g

Local Trial

Balance

Balance

Sheet

Income

Statement

Initiator

Approvals / Exception

Management

Settlement &

Clearing LE

Agreements

Transaction

Initiation & Pricing

Transaction

Matching

LE to LE Transactions

Receiver /

Counter-party

Co

rpo

rate

/ C

OE

Policy &

Rates Methods

Calculate

& Post

Allocations / Cross Charges

ERP System / Enabling Technology

Con

so

lida

tion

, R

eco

ncili

atio

n &

Elim

ina

tio

n L

aye

r

Tax

FP&A

COA /

Data

Mgmt

Governance and Policy Transfer

Pricing

Control

Currency

and FX

Policy

Settleme

nt /

Netting

Policy

TMS

Multi-

Lateral

IC

Netting

In-House

Banking

Central

Hedge

Desk


An ICA framework – actions and desired outcomes Taking action will yield tangible benefits

Reduced exposure to:

• Fines and penalties

• Unintended taxable events

• Foreign exchange (FX) losses and

bank fees

• Excessive audit support costs

• Internal control remediation

Financial reporting integrity

across all global legal entities

A more efficient elimination,

consolidation, settlement and financial

reporting process

1

2

3

4

Define your organization’s

ICA challenges and risks

Build a team and establish

ownership

Agree on framework for

holistic approach

Leverage leading practices

for future state vision

5 Consider technology options

for optimal efficiency

Actions Desired outcomes


ICA Reference Sources

Deloitte Contacts:

• Tom Toppen

• Kyle Cheney

The statements in this report reflect the aggregation of poll responses and are not intended to reflect facts or opinions of any entities. All data, charts and statistics referenced and presented, as well as the representations made and opinions expressed, unless specifically described otherwise, pertain only to the participants and their responses to the Deloitte poll. The information obtained during the poll was taken “as is” and was not validated or confirmed by Deloitte.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2017 Deloitte Development LLC. All rights reserved.


UNDERSTANDING INTERCOMPANY REGULATIONS & CHALLENGES

Susan Parcells, Senior Director of Finance Transformation


REGULATORY

CHALLENGES

Trust is in the Balance™

• New int’l business tax regulation formed by the OECD, published October 2015

• Reporting Requirements

• Country-by-Country details by entity summarized by country

• Transactional Details between entities and affiliates

• Standardized Information for all entities

• Impacts

• Tax authorities can tell how multinationals allocate their income and tax

payments to specific countries

• Requires organizations to have well-organized documentation, data, and

workflow management

• Complex international regulations increases every company’s risk exposure

BASE EROSION AND PROFIT SHIFTING (BEPS)


• Established April 2016

• Changes the treatment of intercompany loans (related-party financing)

• Intends to limit earnings stripping

• Authorizes IRS to treat certain debt (loans) as part stock and part debt

• What does this mean?

• Requires organizations to change the ways in which they handle intercompany financing and cash management

• Huge tax implications if a multinational creates cash pools in order to fund needy businesses from cash rich businesses which is a very common practice in large multinationals.

IRS SECTION 385


• Deem a dividend to occur where the earnings of a Controlled Foreign

Corporation (CFC) are invested in U.S. property of a lasting nature that would

be expected to produce income over an indefinite period of time – e.g.,

obligations of U.S. persons

• The term “obligation” includes:

• Bond/Note/D

• Note

• Debenture

• Certificate

• Bill Received

• AR

• Open Account

• Other indebtedness

IRS SECTION 956


• Exceptions to Section 956 treatment are provided for

• “Ordinary and Necessary” Obligations

• Certain “Short Term” Obligation

• The Service will respect a netting of payables and receivables on the U.S.

parent’s and CFC’s books as a means of payment

• Quarterly settlements on a first-in, first-out (“FIFO”) system of accounting would

be acceptable

IRS SECTION 956


PROCESS

CHALLENGES


MANUAL INTERCOMPANY PROCESSING


UNDERSTANDING INTERCOMPANY

• Transactions sent in Excel via email

• Transactions recorded manually or via

Excel upload

• Excel spreadsheet used to view

Intercompany balances and status

• All documentation hard copies filed at

different locations


INTERCOMPANY PROCESS CHALLENGES

• Immense data

• Volumes & complexity

• Insufficient automation

• Diverse systems and processes

• Multi-currency and tax treatments

• High volume of rebills and corrections

• Globally dispersed entities

• Out of synch timing of entries


INTERCOMPANY STAKEHOLDER CHALLENGES

• Accounting

– IC reconciliation challenges

– Time to close

– Multiple systems of record

• Legal

– Transfer pricing agreements

• Tax

– Strategy and compliance

– Reporting requirements

– Transfer pricing

– Foreign Exchange (FX)

• Treasury

– Consolidation

– Netting

– Settlement

• Compliance

– Regulatory Risks

– Audit Risks

– Proper and sufficient

documentation


FINANCIAL IMPLICATIONS


COSTLY RESTATEMENTS

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Comprehensive income

Pension and other post-retirement benefit

Financial derivatives/hedging (FAS 133) acct

Balance sheet classification of assets

Gain or loss recognition

Debt and/or equity classification

EPS, ratio and classification of income statement

Capitalization of expenditures

Lease, SFAS 5, legal, contingency and commitment

Depreciation, depletion or amortization errors

Consolidation incl Fin 46 variable interest & off-B/S

Inventory, vendor and/or cost of sales

Accounts/loans receivable, investments & cash

PPE intangible or fixed asset (value/diminution)

Cash flow statement (SFAS 95) classification errors

Tax expense/benefit/deferral/other (FAS 109)

Liabilities, payables, reserves and accrual estimate failures

Deferred, stock-based and/or executive comp

Foreign, related party, subsidiary , intercompany

Acquisitions, mergers, disposals, re-org acct

Revenue recognition

Expense (payroll, SGA, other) recording

Debt, quasi-debt, warrants & equity ( BCF) security

# of Restatements

RESTATEMENTS BY REASON SINCE 2001


INTERCOMPANY HUB


AUTOMATED INTERCOMPANY PROCESSING


• Proactive approach to Intercompany

processing

• Visibility into Intercompany process and

balances

• Workflow approval of all Intercompany

transactions prior to posting

• Assurance that Intercompany balances

are accurate and in balance

• Documentation is preserved with the

original transaction records

TRANSFORMING INTERCOMPANY PROCESSES


TRANSFORMING INTERCOMPANY TRANSACTIONS

• Consulting Fees

• Fixed Asset Purchases/Transfers

• Inventory Purchases

• Legal Fees

• Royalties

• Payroll Activities

– Benefit payments

– Payroll itself

• Debt Transactions (IC Loans)

• IC Allocations

– Rent

– Mobile Phone


Centralize

Standardize

Automate

Control

Reduce (Risk)

TRANSFORMING INTERCOMPANY BENEFITS


THE BLACKLINE SOLUTION


RISKS, REWARDS & RESULTS

• Bring all intercompany transactions into a single, centralized system

• Automate the workflow approval process around IC transactions

• Automate the creation, population, validation of all IC journals to disparate, disconnected ledgers

• Automate the creation of necessary sequential IC invoices

• Provide a single, centralize settlement view allowing for ‘what if’ analysis on currency rates, partial

settlements, and IC payment optimization

• Provide a repository for all information needed for regulatory reporting, tax audits, and financial audits

• Reduce risk of fraud

• Reduce risk of manual errors

• Automate the reconciliation process

• Reduce costs, cut dedicated headcount


Q&A


UPCOMING WEBCASTS

BlackLine Intercompany Hub – In Depth Demo

BEPS Regulation Review w/ Expert Q&A

IRS Section 385 Review w/ Expert Q&A

IRS Section 956 Review w/ Expert Q&A


INTERCOMPANY RESOURCES

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