Dbriefs - Controllership - Perspectives - 121119 - Slides

Intercompany accounting:
Taming the wild beast

The Dbriefs Controllership Perspectives series
Beth Kaplan, managing director, Deloitte & Touche LLP
Kyle Cheney, partner, Deloitte & Touche LLP
Katie Kokol, finance director, Johnson & Johnson
Mieke Van Gheluwe, vice president, finance, Dell Technologies
December 11, 2019

Agenda
Overview of intercompany accounting
Common intercompany challenges
Planning your journey to advance

your intercompany capabilities
Technology enablers to streamline

your intercompany accounting
processes
Copyright © 2019 Deloitte Development LLC. All rights reserved. Intercompany accounting: Taming the wild beast 2
Controllership in the green
Within the Controllership function, there are many areas of responsibilities and today we will
focus on intercompany accounting.
Intercompany Management
reporting
Consolidation Reporting
Cash flow
TECHNOLOGY GOVERNANCE &

COMPLIANCE
Accounting 10-K
ENABLEMENT
standards 10-Q and
Disclosures
Financial
Close Variance Statutory Analysis
analysis reporting
Reconciliations
Planning
COMMON
INFORMATION
MODEL M&A
New
Strategic tech
business
Task support
management Product / Special
service P2P, O2C, R2R, FA, INV projects
Journals and Profitability Budget &
costing IPO
allocations forecast
ACCOUNTING POLICY
CENTRALIZED FINANCIAL TRANSACTIONS

FIN Data OPS Data
DATA & DELIVERY
ANALYTICS OPS Data FIN Data MODEL
FIN Data
DATA OPS Data
Copyright © 2019 Deloitte Development LLC. All rights reserved.

EMEA APAC AMERICAS Intercompany accounting: Taming the wild beast 3
OPS Data
Polling question #1
Does your organization plan to change how much time and effort it spends on intercompany accounting in
the next 12 months?
• Yes—More time and effort to be spent

• No change
• Yes—Less time and effort to be spent
• Don’t know/not applicable
What is intercompany accounting (ICA)?
Intercompany accounting includes... …and consists of inventory and

non-inventory transactions*
• Recording and reporting of internal financial activities
• One legal entity doing business with another
Inventory transactions
• Sales of products and services, fee sharing, cost sharing
arrangements, cost allocations, royalties, and financing activities • Supply of raw materials or semi-
finished material from an
• Associated risks that make it not just an accounting issue
intercompany supplier to a
manufacturing facility
• Supply of finished goods to an
intercompany distribution center
A manufacturing company faces a federal grand-jury investigation involving • Direct shipment from an intercompany
intercompany cash transfers related to its tax planning distribution center to customer sold
by a commercial entity
An insurance company is forced to restate financial results stemming from its
failure to eliminate certain intercompany transactions related to variable-
interest entities Non-inventory transactions
• Research and development charges
A company’s weak internal controls over its related-party transactions allows • Shared service transaction charges
insiders to fraudulently overstate inventory, leading not only to Securities • Royalty payments
and Exchange Commission - imposed fines, but also two lawsuits
• Insurance charges
An oil company’s improper intercompany accounting results in a restatement * Example transactions are illustrative and not all-inclusive
of its financial statements and a subsequent lawsuit accusing it of
misleading investors about the effectiveness of its internal controls
Reality of many organizations’ current finance landscape
There are typically three common pain points that many organizations often find
themselves struggling with that can lead to challenges with ICA processes.
Transaction Disparate Process
Volume Systems Complexity
Our organization has

We have over 1M 100+ ERP instances
The complexity of the
intercompany due to a long history of
intercompany process is
transactions and mergers and
like a ‘big elephant’; we
require significant acquisitions, paired with
need to know where to
manual effort to perform a lack of system
take the first bite out
reconciliations at month- alignment that has
of the elephant
end resulted in highly
unstandardized
intercompany data
These challenges often lead to an increased level of effort and higher probability
of error in key process areas across finance.
Polling question #2
How would you describe your company’s intercompany accounting capabilities?

• Leading— Global policy executed timely with appropriate mix of preventative/ detective controls
• Advanced - regular policy compliance monitoring, clear ownership, and accountability supported by a
center of excellence
• Defined— high-level policy, some global consistency, escalation processes, trade/ service agreements in
place
• Developing—reactive approach to monitor or detect intercompany out-of-balance positions
Organizational complexity drives ICA challenges
Organizational complexity can lead to numerous ICA challenges that pose significant
risk across finance.
Transaction Volume Finance/Accounting

• Lack of visibility into transactions • Financial misstatements
• Increased manual effort to reconcile intercompany • Internal control deficiencies
transactions
• Fraud risk
• Out-of-balance intercompany accounts
Disparate Systems Tax

• Disaggregated data sources • Misclassified profits
• Invoices not linked to intercompany transactions • New regulatory
• Manual intervention required for transactions requirements
between entities
• Base Erosion and Anti-
Abuse Tax (BEAT)
Process Complexity
Treasury
• Inconsistent processes and rules across
businesses • Liquidity
• Lengthy process to trace and track down issues • Foreign exchange exposure
Polling question #3
Which of the following ICA challenges does your organization currently struggle with the most?
• Disparate systems
• Transaction matching & account reconciliation
• Complex intercompany agreements
• Intercompany settlement
• Governance & polices
• Other
Framework to assess your ICA process
Before embarking on a journey to optimize your ICA processes, it is important to
consider seven key components.
Governance and policies Intercompany pricing

Global policy with materiality Clearly defined pricing methodology
enforced; mix of preventative and with traceable components
detective controls
Data management
Internal and external reporting Intercompany Clear ownership of
Standard KPI monitoring, dashboard Accounting intercompany master data;
reporting and drill-down to Framework standard data definitions and
transactions coding across systems
Reconciliation and elimination Transaction management

Automated transaction-level Automated invoicing and workflow
matching, reconciliation and approval streamlines processing
elimination and reduces errors / exceptions
Netting and settlement
Automated, dynamic settlement and
clearing; efficient cash management
Planning your ICA journey
Seven key steps are recommended as organizations begin their journey to optimize
their ICA processes.
Develop implementation
roadmap
to capture high-level
Conduct an intercompany activities and project
maturity assessment milestones
to identify the current and
desired state as it relates to
the vision of the organization
ICA planning
Gather pain points, identify key Foundational readiness
stakeholders, and get buy-in Clean up and get the Technology
from cross-functional leadership foundation ready while implementation
to “get the ball rolling” beginning to experiment Pilot and global
with enabling technologies rollout
ICA process deep dive

Define the future Deep dive into your current ICA processes
state vision and transaction-level detail to assess in terms
to align with the of ERPs, transaction types, legal entities, and
vision of the trading relationships
organization
Polling question #4
Where do you believe your organization stands to benefit the most from a comprehensive ICA program?
• Financial reporting integrity
• A reduction in fines, penalties, or unintended taxable events
• A more efficient month end close and/or statutory reporting process
• A more reliable internal control environment
• All of the above
• Don’t know / Not applicable
Art of the possible: Technology enablers to streamline ICA
Many companies are beginning to experiment with various technology enablers to help
them simplify their ICA processes.
ERP Based Solution Process Automation Solution Blockchain
OVERVIEW: An integration
with Blockchain can reduce
OVERVIEW: Solutions OVERVIEW: Central volume and complexity of inter-
High Medium Low
inherent in the client’s repository for intercompany company reconciliations by
adoption adoption adoption
base ERP system activity, providing visibility getting data right at origination,
rate rate rate
and data integrity real-time value transfer and self
executing reconciliations
through smart contracts.
STRENGTHS LIMITATIONS STRENGTHS LIMITATIONS STRENGTHS LIMITATIONS
• Basic functionality • Transaction level • ICA transaction • Limited • Reduce volume • Distributed ledger
for posting an ICA reconciliation initiation through automation for and increase versus traditional
entry • Workflow settlement and inventory speed/accuracy of dual-entry
• Ability to reconcile approvals clearing transactions reconciliations accounting
ICA balances at • Ability to reconcile • Cash settlements using “smart (physical ledger)
• Settlement /
the periodic at the transaction require treasury contracts” • Limited capability
clearing
balance level level system support • Potentially reduce for ICA – not an
• Facilitates ICA • Dashboard cost and cycle time accounting
allocations reporting / of inter-company system
analysis settlement
• Ability to post • Scalable
transactions distributed ledger
systematically that • Extended audit
cross ERP’s trail of assets
movements
Polling question #5
Will your organization leverage advanced technologies (e.g., robotic process automation, artificial
intelligence, cognitive computing) for intercompany accounting in the next 12 months?
• Yes
• No
• Don’t know / Not applicable
Key takeaways
Organizational
complexity
continues to drive challenges
with intercompany accounting Leveraging a
framework
can help you to assess your
intercompany accounting processes
Make sure to plan

your intercompany journey
Question and answer
Join us January 29 at 2 p.m. ET as our
Controllership Perspectives series presents:
The evolution of accounting: Building a

sustainable framework for the future
Eligible viewers may now download CPE
certificates.
Click the CPE icon in the dock at the

bottom of your screen.
CPE
Contact information
Beth Kaplan Kyle Cheney

Managing Director Partner
Deloitte & Touche LLP Deloitte & Touche LLP
bkaplan@deloitte.com kcheney@deloitte.com
Connect with me on LinkedIn Connect with me on LinkedIn
Katie Kokol Mieke Van Gheluwe

Finance Director Vice President, Finance
Johnson & Johnson Dell Technologies
KKokol@its.jnj.com Mieke.Van.Gheluwe@dell.com
Connect with me on LinkedIn Connect with me on LinkedIn
This presentation contains general information only and Deloitte is not, by
means of this presentation, rendering accounting, business, financial,
investment, legal, tax, or other professional advice or services. This
presentation is not a substitute for such professional advice or services,
nor should it be used as a basis for any decision or action that may affect
your business. Before making any decision or taking any action that may
affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who
relies on this presentation.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their
related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide
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Copyright © 2019 Deloitte Development LLC. All rights reserved.

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Intercompany accounting:

Taming the wild beast

December 11, 2019

Overview of intercompany accounting

Common intercompany challenges

Planning your journey to advance

Technology enablers to streamline

TECHNOLOGY GOVERNANCE &

CENTRALIZED FINANCIAL TRANSACTIONS

Copyright © 2019 Deloitte Development LLC. All rights reserved.

• Yes—More time and effort to be spent

Intercompany accounting includes... …and consists of inventory and

Our organization has

How would you describe your company’s intercompany accounting capabilities?

Transaction Volume Finance/Accounting

Disparate Systems Tax

Governance and policies Intercompany pricing

Reconciliation and elimination Transaction management

ICA process deep dive

Make sure to plan

The evolution of accounting: Building a

Click the CPE icon in the dock at the

Beth Kaplan Kyle Cheney

Connect with me on LinkedIn Connect with me on LinkedIn

Katie Kokol Mieke Van Gheluwe

Connect with me on LinkedIn Connect with me on LinkedIn

Copyright © 2019 Deloitte Development LLC. All rights reserved.

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