Context: Intercompany settlements are a necessary, if unloved, step when one legal entity within a corporate group owes funds to another entity or to the parent company. The issue arises with transactions such as the sale of goods or services, intercompany loans, and licensing or royalty fees. The multifaceted settlement process becomes increasingly complex when the entities have different functional currencies and the cross-border choreography involves functions including treasury, tax and accounting.
- ERPs, TMSs, in-house banks, payment factories and netting tools often play valuable roles in an intercompany settlements. But as one tech vendor explains to potential customers: “This process, often managed through journal entries or fund transfers, can be tedious and prone to delays when resources are constrained.
- “Consequently, intercompany accounts may remain open for extended periods, which can obscure financial results and incur costs, such as the loss of potential interest or the impact of fluctuating foreign exchange rates.”
Member question: “How does your company currently process intercompany settlements? Does your treasury team meet with accounting and tax and then process manual wires? Does your AP team process the transfers via invoices?”
Peer answer 1: “Our accounting team generates an intercompany invoice which then goes through the full approval process for each of our entities. There are some standard accounting reviewers/approvers, then various others who approve based on the entity (some in legal, tax, compliance or those simply within the business line).
- “Once approval is received, treasury: receives the invoice; reviews and approves the matching settlement run in our ERP (which books the accounting entries automatically); ensures that account is adequately funded; wires the cash via our TMS. We previously wired the cash via our ERP but the setup process was tedious each time we had a new interco relationship, so we shifted the cash payment process to our TMS.
- “Our AP team is involved in the settlement run setup when we initially set up an intercompany payment. However, they are no longer involved in the cash wires since these are now processed in our TMS. We also ran into timing issues at times because we process intercompany around month end and AP closes two business days prior to month end, so the TMS was an easier option.”
Peer answer 2: “We have a mix of both. Our central intercompany (IC) team prepares reconciled settlement amounts, some of which are paid via AP while others are settled manually through wires; a smaller portion are multilaterally netted through our in-house bank. Tax and legal are typically involved at setup of new IC paying relationships. Much of the accounting is automated either via the TMS or ERP with some exceptions.”
Peer answer 3: “We have an intercompany netting process for any entities in countries where netting is allowed. The system essentially takes all open invoices from an AR perspective and then nets them together to determine which entities are in a payable position and which entities are in a receivable position. Then, once per month (typically the third week of the month on a day that is specified in our annual IC netting calendar), all of the invoices are run through the netting portal and an FX rate is applied so that entities can make a single payment in their functional currency.
- “All inflows and outflows are then settled on the same day to allow for FX hedging of intercompany positions, where desirable. Payments are executed by whoever manages cash for the paying entities (can vary between treasury and AP).
- “For countries where netting is not allowed, we also try to require settlement during the same week as netting. The nice thing about netting is that payment must be issued on time; otherwise, the legal entity will pay interest on the overdraft balance they cause.”
Another member asked this peer, “Which systems are you using to drive all this? Is there a lot of manual input in the process you described?” Peer 3 replied, “We use Citibank’s netting tool (although some TMS systems can also do the netting part, just not the FX part, of the process). We currently download the list of open invoices from our ERP and then upload to the netting tool for the reconciliation and calculation of payable/receivable positions.
- “We are working on a project to automate that transmission (this process was initially set up many years ago). We recently considered moving this to our TMS provider, but found that it might require additional work on the FX settlements, so we are keeping Citibank for now.”
Peer answer 4: “We implemented Virtual Trader, which interfaces with our Oracle GL and enterprise payments hub. Through Virtual Trader, we can manage the intercompany creation, intercompany reconciliations and intercompany settlements.”
Peer answer 5: “We use a SaaS netting system for all invoices that can be processed via netting. We complete netting once a month and combine it with hedge and spot transactions to minimize FX impacts. The netting system receives a listing of AR invoices which we push from our ERP. - “We send a preliminary report one week ahead of netting, which allows local finance and accounting teams time to review and make any corrections. On netting day, treasury uses traded rates to apply to the IC invoices and calculates the final netting settlement amounts. Netting settlements may be directly with the netting center in certain currencies; otherwise, the settlements are traded. The netting payments are processed by treasury using our TMS.
- “For non-netting entities, payments may be processed by our local teams or treasury, depending on the amount of the transfer, particularly if it will be a cross-currency payment.”
The member who posed the question spoke to several peers and later told NeuGroup Insights, “What I found is that most companies still involve treasury to process a lot of the payments. It doesn’t seem like this will go away.”
