Inter-company accounts 1536

  • Why the inter-company accounts are important when they are eliminated on consolidation. I have thought over the subject and couldn’t really convince myself for reason other than that it affects the Presentation and Disclosures assertion.
    For example:
    Division A and Division B are to be consolidated in group accounting. A has a debit balance of GBP100,000 and B books are showing a credit balance of GBP30,000. The scrutiny revealed that a payment of GBP70,000 was made by division B which remained un reconciled as at balance sheet date. This has caused the accounts reporting an incorrect picture of companies’ financial affairs, a debit balance of GBP70,000. Had the balances reconcile the difference of two accounts would be reflected in the cash at bank rather being clubbed as other debtors.
    Does any one can give a more definite example that clarifies the concept to believe that they are high risk accounts and if they are by what assertions?
    I appreciate all the replies and thanking you all in advance for anticipated cooperation.

  • Logic would seem to support leaving these accounts out of scope for SOX, but it looks like you have properly identified the primary reason that intercompany accounts should be included in your SOX scope.
    There are two primary areas that need to be addressed -

    1. Proper elimination of intercompany profits. You need to ensure that you are not grossing up the income statement for revenues and expenses that should eliminate or recording any net income or expense in your consolidated financial statements related to intercompany activity.
    2. Proper elimination of intercompany balances. You need to ensure that timing differences in recording activity are properly classified in your financial statements. Too often, one affiliate cross-charges a sister affiliate for expenses that should be included in the consolidated financial statements. If the sister affiliate is behind in recording the I/C charge, then the financial statements are mis-stated if the out-of-balance elimination entry on the balance sheet just reclassifies the OOB to another balance sheet account (usually other accrued liabilities).

  • This is an excellent question. It’s a good example also of why SOX might be considered a minimum baseline for financial controls. Adding accountability beyond the legal requirements is a good thing, if you can do it inexpensively.
    SOX guidelines are sometimes subjective to interpretation. Having complementary controls for any weak areas covers your company in case an external auditor were to review the process.

  • Inter-company accounts may very well come into scope for good reason:

    1. You need to consider the correct classification of transactions between inter-company and thrid party with processes such as PtoP and OtoC
    2. As part of Financial Statements Close you would need to consider the confirmation of inter-company balances as an integral part of the process - in particular ensuring that they do, in fact, agree.
    3. As part of the consolidation process you will need to consider the correct elimination of inter-company balances and other inter-company transactions.

  • Thanks guys, this is exactly what I was looking for.

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