lunes, 26 de enero de 2015

Guide: The reconciliation of intra-group transactions - Process optimisation




In this blog we are going to look how to implement a simpler and more effective process ensuring better financial information quality.
This table summarises the process we recommend and compares it to a traditional process with its limitations. The optimal process is detailed in the following blogs.



You can download our white paper:  Guide: The reconciliation of Intra-Group Transactions

Traditional process                               Optimal process

At what level does interco reconciliation take place?

In the consolidation department

In local accounting departments

When?

During the consolidation period

During local accounting close

Tool used

Excel

Or consolidation software functionality (automatic centralised reconciliation of counterparty positions differences are resolved outside of the tool)

Or a balance reconciliation tool (the reconciliation process is part of the consolidation - balance reconciliation process)

Transaction reconciliation software/ transaction matching for automatic reconciliation/the reconciliation process is done at the local accounting department level and can be corrected, if required, to ensure better financial data quality/the tool is a collaborative platform for more
effective communication between the different people involved

In the event of differences

Exchange of Excel files, alignment on the seller, etc.
The consolidation department is copied on all email exchanges between the entities and is quickly overwhelmed. Difficult to justify differences, lack of time

The goal of the reconciliation isn’t to get a zero difference, but to be able to justify differences.
Differences are explained and information is provided to the consolidation department for required journal entries. Local accounting  is corrected with the right information, if necessary

Results

Risk of consolidation process delays which can result in forced entries.
The fast close is endangered (number quality versus meeting the close deadline)
Lack of reliability
Consolidation department time wasted, resources are used for low added-value work

Automatic matching of all transactions. Only non-reconciled transactions are studied Reconciliation is done before the close process and doesnt interfere with it
Consolidation teams dedicate
100% of their time to consolidation adjustments and results analysis
Local accounting  is corrected ensuring better financial information quality Transactions are perfectly auditable

Process optimisation: automation - to what extent and with what results?

Interco reconciliation is a complex process and many groups are trying to automate it. 

The projects we are currently working on were initiated by clients who want to improve: 
  • Productivity (reduce the number of employees working on interco reconciliation and reduce the time they spend on it) 
  • Transaction traceability for better auditability. 
Interco reconciliation, a complex and often poorly managed process.

Intra-group transactions are often thought to be part of the consolidation process because they are eliminated at consolidation time. 

The search for differences between intra-group account balances becomes the group consolidation department’s responsibility and is often very tedious. This is because consolidators don’t have access to the data sources. There can also be a number of reasons for the differences. 

Among the most commons are:
  • Cut-off date discrepancies 
  • Different close dates 
  • The conversion of transactions initially denominated in foreign currencies 
  • Sales accounted for as a fixed assets at the purchaser’s 
  • VAT paid by the purchasing company 
  • Rediscounting of debt with the banks 
  • Etc. 
What do groups do today? The current situation. 

Some groups exchange Excel files among entities so that they can agree amongst themselves. 

All consolidation software packages normally provide intra-group account reconciliation functionality. 

Consolidators have two options depending on the software: 

• Either the consolidation software centralises the interco reconciliation process:  the application automatically reconciles counterparty positions centrally. The tool calculates any differences at the account balance level. However, it is up to the consolidation department to coordinate the resolution of differences: email exchanges, sending of .xls files to try to resolve differences.

• Or the software provides a more elaborate module to reconcile intercos and give access to the entities. The consolidation department then has the option of decentralising dispute resolution and entrusting reconciliation to the entities. They can then reconcile amongst themselves. A data visualisation table enables them to view the positions of their counterparties. Reconciliation is done 
on the balance, in the transaction or local currency. The risk is that entities artificially align on their counterparty to make the interco difference disappear. This threatens financial data quality. Among other criticisms reported by operations: while the tools highlight the differences, they don’t provide much help in justifying the differences (exchange differences, temporary differences, fixed-asset production, VAT impact, etc.). In addition, they don’t always enable decisions that impact accounting data and enable corrections to local accounting information, if required. In the event of a difference, buyers and sellers exchange Excel files to try to resolve the differences via the transaction details. These file exchanges make audits difficult. 

Reconciliation is done at the balance level in both instances. If the balance is different, the transactions are reviewed for the reconciliation. The risk is that certain transactions artificially reconciled by two entities “slip through”. The quality of the process and financial data obtained isn’t guaranteed. 

The interco reconciliation process is done at consolidation process time in all of the cases we have just seen. In our opinion this is too late. 

There is a third possible solution at the accounting team level. It involves implementing a dedicated interco account reconciliation application on a collaborative platform which enables transaction matching to speed up and improve reconciliation quality. 

The idea in this case is to bring the interco reconciliation process down to the level of the entity which will use the tool for their accounting close. This means that the process is somewhat reversed. Instead of starting with the balance and working back to the transactions, reconciliation is done at the transaction level first.

In the next blog I will look the process From balance reconciliation to transactional reconciliation.

For more information you can download our white paper:  Guide: The reconciliation of Intra-Group Transactions



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