Inter Company Transactions

An inter-company transactions list provides information on all transactions that have occurred between your company and your group entities.

Intercompany transactions arises when the unit of a legal entity has a transaction with another unit within the same entity. Many international companies take advantage of intercompany transfer pricing and other related party transactions to influence IC-DISC, promote improved intercompany transaction taxes, and effectively enhance efficiency within the company. Intercompany transactions can be essential to maximizing the allocation of income and deductions

An inter-company transactions list contains details of the transactions within your corporate group including payment of dividends, purchase and sale of assets (e.g. inventory or machinery) and any borrowing and lending.

Information that is covered:

• Transaction Details: Nature and the type of a particular transaction entered
• Dates: Start and end dates of each transaction
• Parties Involved: Names of the group entities involved in each transaction
• Transaction Value: The amount and status involved in each transaction
• Documentation: Documents and agreements that provide the evidence of each transaction.

Examples of intercompany transactions:

• Two subsidiaries
• Two departments
• Parent company and subsidiary
• Two divisions

Importance

Intercompany transactions can help improve the flow of finances and assets greatly. Transfer pricing studies can help ensure intercompany transfer pricing falls within arm’s length pricing to help avoid unnecessary audits. Intercompany transactions accounting can help keep records for resolving tax disputes, especially in countries where the markets are new and there is little or no regulations governing related party transactions. Here are few areas affected by the use of intercompany transactions:

• Sales and transfer of assets
• Loan participation
• Dividends
• Transactions with member banks and affiliates
• Insurance policies
• Management and service fees

Pros of addressing Inter-Company Transactions

• Facilitate transparency and provide real-time information on your inter-company transactions.
• Create consolidated and accurate financial statements and avoid any misrepresentation of your company’s financial position.
• Implement uniform accounting and treatment policies and procedures for inter-company transactions.
• Comply with tax norms and regulations related to inter-company transactions across jurisdiction.
• Mitigate any potential for disputes between your company and its entities as each transaction is documented.

Any transaction between affiliates of a company group requires elimination, including:

• Unrealized gain in ending inventory due to intercompany sale of above-cost inventory not later sold to third parties prior to year-end.
• Elimination of equity in company acquisitions: When one company acquires another company, only the acquirer’s share of the shareholders’ equity of the acquired company is eliminated through consolidation in the equity section of the consolidated financial statements.
• Unrealized gain due to intercompany sales of fixed assets above net book value: Such sales are only internal transfers of assets and no gain or loss should be recognized.

Intercompany loans: When one group company makes a loan to another affiliated company, there are several items that have to be eliminated on both sides:

• Loans receivable and loans payable;
• Interest income and interest expense; and
• Interest payable and interest receivable.

Elimination of intercompany profits: Any intercompany profit or loss on assets remaining within the group must be eliminated and only profits and losses from third-party transactions should be included in the consolidated statements.