Insights

Intercompany consolidation: a new approach

Intercompany : continuous consolidation

Published on July 9, 2021
Reading time: 3 min
Maud Tezenas du Montcel

You know it better than anyone else: the period of time when you have to consolidate the financial transactions of your intercompany is not the greatest one of the year. Financial closing is time-consuming and a bit anguishing, but also unavoidable. Too often, intercompany consolidation is synonymous with a lot of work in a stressful environment for the financial team. How can we make it better? In this article, we’ll present some alternatives to traditional closing. But what if we told you reconciliation can be bypassed altogether, while having up-to-date accounting? Sounds like a dream? Read on and let us know what you think!

Painful and time-consuming consolidations

What is the most common reconciliation set up?

You probably just went through it yourself with the mid-year closing. The majority of groups address the reconciliation of intercompany flows the same way: a posteriori, meaning reconciling balances during the accounting closing period. And let’s just say it is not the smoothest process ever.

First, you have to wait for balances to be finalised to see the inconsistencies emerge on your balance sheet. Once the discrepancies have been identified, the real work begins. To understand the differences, you have to go back to the transaction level. But of course, you do not have the details available at a glance. You have to start the tedious work of investigation and dig deep in all your data. It is cumbersome to say the least.

Why is this process not working?

Consolidating intercompany flows this way holds a lot of disadvantages for your company. It is a waste of time, data, talent and money. And it means you have a loose control of your financial processes. 

  • Waste of time: the data you need to reconcile the inconsistencies is the contextual one. Email exchanges, untracked discussions with stakeholders… It takes time to recover the right data. 
  • Waste of data: the so-called ‘exceptional’ transactions are processed outside of your financial systems. Think about Excel files for example. There is an important loss of data.

  • Waste of talent: the investigative burden is shared between the accounting and consolidation teams. In a stressful time, when you identify discrepancies at the very end of the period, collaboration on a daily basis is difficult. Your financial team spends a lot of time on manual work, preventing them from focusing on more valuable tasks.

  • Waste of money: this one is about your team (paying them to do tasks that are way below their expertise) but also about the immobilisation of cash you have to make to compensate for the inconsistencies. And bear in mind that you have a tax risk, with the misallocation of transactions to the wrong jurisdictions. 

The overall result is a huge inefficiency. As an illustration, let’s take this hotel chain we have met once. The chief accountants of the various subsidiaries are all gathered together in a hotel for a full week to balance the intercos… If this is not a very obvious inefficiency, what is?

Traditional alternatives to intercompany consolidation

The intercompany reconciliation is not a new problem. Some groups have dug into alternatives to the process we described earlier. You usually have two options: netting and matching. 

  • What is netting? 

This system centralises the cash balances of several subsidiaries of the same company to offset accounts receivable and accounts payable. It is also called ‘bilateral clearing’. Instead of reconciling each transaction, the payment between the subsidiary and the parent company is made only for the net difference between receivables and payables. 

With this technique, each entity’s transactions (payments that are made) are summed and converted into a single currency amount to pay or to receive from the netting center. It is quite useful in an international environment: it reduces the exchange rate risk as a smaller net amount of foreign currencies can be hedged between the entities (vs gross amounts usually).
Netting is an appropriate solution for the financial problem of reconciliation. But that’s about it: the contextual part is not addressed and gets even more complex to dig in with this technique (you lose the information about each action). Discrepancies accumulate and contextual data are still at large. 


  • What is matching?

As its name suggests, the matching technique is a solution that matches a posteriori the transactions, automatically. This works great, for a small part at least: from 30 to 40% of inconsistencies are identified this way. 

Knowing that, you may be asking yourself two questions. First, what about the remaining 60 to 70% of inconsistencies that exist but are not identified automatically? You have guessed it: your team has to do manual checks all over again… Second, what about the identified discrepancies? Well, once again, they are difficult to explain and you have to check the details of each transaction to learn more. 

What is the takeaway of this first part? Intercompany consolidation is a painful process, for all groups. Even the seemingly attractive alternatives keep failing at identifying all discrepancies and your financial team has to go back to the usual time-consuming reconciliation configuration. Everything is not lost though. More than that, it is the perfect time to change the way you do intercompany consolidation. Let us explain why.

The time for change is now: a perfect storm situation  

The mid-year closing period is just behind you. What if you could start the next round of closing with a blank sheet and new processes? You could spare yourself a lot of trouble and it is definitely the best time to change. Here’s why.

Scheduled end of maintenance of popular on-premise consolidation softwares

Two well-known software companies that offer star on-premise consolidation tools have announced the end of the maintenance for said softwares. Born in the 90’s and 2000’s, Oracle’s HFM (previously Hyperion) and SAP’s BFC (previously Cartesis) will not be updated anymore and support for these softwares will be progressively discontinued.

This is a game-changer for the industry and will lead to a revision of the market offers. We expect to see a substantial migration towards modern cloud-based solutions. Though, most of those solutions are not enough to make your life easier during consolidation periods. But that is the perfect time to rethink your financial processes and make reconciliation disappear, thanks to a new way of managing your finances and accounting. 

Regulatory change requiring more traceability: the VAT group 


Another good reason to change your intercompany consolidation process is the new French regulation about VAT. This is one of the main measures of the ‘Loi de Finances pour 2021’: the VAT group. For a group of companies, it consists in choosing a single referent for VAT purposes. In French, ‘l’assujetti unique’. 

Why does this option have an impact on your consolidation process? The group members should provide the referee the information about the cleared transactions between group members. Hence, you need to have the possibility to track those cleared operations.  

The VAT group is not mandatory, it is an option. Obviously, it is a strategic decision, especially as the scope of the VAT group can be different from the taxation one. Your team has to carry out an in-depth review to assess the changes required for your information systems and for a full traceability of transactions. 

The choice of your reporting solution is critical. Let’s remind ourselves that the amounts lost due to errors or omissions on your financial processes can be significant: up to 3% of the annual VAT base! 

It is the right time to change your consolidation approach, from both software and regulatory perspectives, to get a modern financial and reporting solution. 

Making intercompany accounting easier with Trace  

As we stated previously, the end-of-cycle approach is not the best one when it comes to intercompany consolidation. You are missing a lot of information with traditional consolidation tools. What you need is a downstream approach. That is what we provide at Stratumn with Trace

An adaptable upstream approach for financial reconciliation  

We adopt a simple approach to a complex problem: reconciling the human, the process and the data, in that order. Contrary to traditional consolidation solutions, Trace adopts an upstream approach: the tool accepts all types of flows, different data formats and easily manages last minute changes and exceptions. We are not talking about financial data only, but also the contextual one. All of the information is taken into account, from the beginning: we make reconciliation disappear by having an in-depth view of every operation throughout the whole process. Basically, you have a continuous reconciliation, directly to the transaction level. You do not have to dig into the details of each transaction afterwards because all the information is linked and matched from the start. 

As we know you have invested a lot of time and money to set up your financial tools and processes. Changing everything at once can be an unfathomable task. That is why Trace can be deployed on certain intercompany flows to begin with or on certain entities only to replace your existing system. It can also supplement your processes instead of replacing them. We provide a variable geometry approach so you can tailor our solution to your needs, for maximum efficiency. 

Our solution is cloud-based so you can implement it quickly, giving fast results, both on cash optimisation and user satisfaction. 

Full transparency and traceability on your financial processes

You have probably heard of blockchain. This technology will profoundly change industries thanks to its tamper-proof and collaborative nature, which creates trust. At Stratumn, we decided to use blockchain in our technological overlay to give a complete traceability of financial flows. 

It is particularly important for intercompany consolidation: Trace tracks the information and files exchanged in different formats from end to end, giving you a 360° view on your data (the financial one of course, but also the contextual one). The closing period is not so anguishing after all when your technological solution worked all the discrepancies out by itself!

AXA Partners uses Trace to transform its intercompany processes  

Still seems too good to be true? Do not take our word for it then, but listen to our customers. AXA Partners chose Trace to transform its intercompany processes. The aim was clear: optimising cash management and improving the team’s collaboration. 

With Trace, they were able to simplify collaboration in a process involving many actors with different practices and constraints, optimised the tracking of exchanges and actions while adapting to work habits, and overcame the compartmentalised accounting systems specific to each entity. 

If you are interested in making your reconciliation processes easier, faster and less painful for your team, ask our experts for a demo and join the financial revolution! 

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