Intercompany transactions, the financial exchanges between at least two different entities that operate under one parent company, can be a reconciliation nightmare for accounts payable (AP) teams trying to close the books.
When working inside NetSuite, there are a few essentials to make the process pain-free. Our NetSuite expert Peggy Evleth, Senior Solution Architect, recently gave the following advice:
1. Essential configuration foundations
- Dedicated account types: It is critical to establish dedicated intercompany accounts specifically as Accounts Payable (AP) and Accounts Receivable (AR) account types.
- Representing entities: NetSuite should be configured to generate representing entities (intercompany customers and vendors) for each subsidiary. This allows the system to treat intercompany transactions like third-party transactions, providing visibility into aging reports and ensuring “arm’s length” compliance.
- Intercompany framework: Enabling this feature allows the system to automatically flag transactions for elimination at month-end, preventing “ghost revenue” from inflating consolidated financial statements.
2. Managing foreign exchange and currencies
- Consistent currency: Transactions between entities with different functional currencies must be booked in the same currency on both sides. If one entity books in USD and the other in EUR natively, the balances will not revalue correctly, leading to reconciliation errors.
- Settlement policy: You should never settle an intercompany balance in a currency different from the original transaction, as NetSuite cannot effectively match and clear those documents.
- FX exposure: Intercompany balances are monetary assets subject to revaluation. Large, unsettled foreign balances can create significant “below the line” volatility on the P&L.
3. Intercompany netting and settlement
- The netting process: NetSuite’s intercompany netting feature automatically offsets AP and AR balances between two specific entities.
- The limitations of netting: Netting only works for AP and AR account types; it cannot be used for “other current asset” or “due to/from” GL accounts. Furthermore, it nets by total entity balance rather than by segments like class or department.
- Managing cash-flow: If a subsidiary lacks the cash to settle a balance, it is common practice to convert that debt into an investment subsidiary or long-term debt instrument via journal entry to avoid ongoing FX pain.
4. Global compliance and “arm’s length” requirements
- Statutory requirements: Many foreign tax authorities (such as those in Belgium) require arm’s length transactions, meaning entities must exchange formal invoices and vendor bills rather than simple journal entries.
- Transaction automation: To handle these requirements without manual entry, organizations can use intercompany Purchase Orders (PO) and Sales Orders (SO) or leverage third-party AP automation tools to sync invoices across subsidiaries.
5. Reporting and external tools
- Reconciliation: NetSuite provides an Intercompany Reconciliation Report to trace balances across subsidiaries, but this report relies entirely on the use of AP/AR account types.
- Third-party enhancements: While native NetSuite handles basic needs, the experts suggest third-party bundles (like NetGain or RSM) for complex tasks such as line-item distributions across multiple entities or automated consolidated reconciliations.
Interested in the questions accounts payable professionals had to ask about Intercompany Transactions in NetSuite? Watch our on-demand webinar here:
