Intercompany Reconciliations Done Right – Part 2
In part 1 of this series on intercompany reconciliations /eliminations, we provided a high-level overview of the need for intercompany eliminations in the financial consolidation process, the pros and cons of various software design approaches to intercompany elimination, and an overview of the OneStream approach to this process.
In this installment, we take a look under the covers at how intercompany (IC) eliminations are managed in OneStream XF. Did you miss part 1? Read it here.
Enterprise-Class Intercompany Eliminations
Enterprise-class consolidation software applications provide intercompany eliminations that are powerful enough to handle sophisticated business needs yet allow for easy reconciliation. Not all software that claims to do financial consolidations provides both, and in some cases, it provides neither.
In other words, there’s a better option. Here’s what OneStream XF provides:
- Prebuilt and easily configurable dimensions
- Ability to handle the most sophisticated intercompany eliminations
- Ability to dynamically limit entry to avoid mistakes
- Multiple prebuilt and custom report options to help users proactively communicate and resolve issues
Combined with OneStream’s ability to drill-down into transactional details and relational blending capabilities, OneStream XF provides an unmatched ability to see and manage intercompany activity.
Not every application that claims to handle financial consolidations can do even the basics. Some of the leading applications in the market include some of the features in OneStream XF, but not all. No system can drill into underlying details as simply as OneStream.
If you’re considering a consolidation system, you should be asking these questions:
- How simple is it to set up basic intercompany eliminations?
- Can the system handle complex eliminations?
- How robust is the reporting?
- Are eliminations handled at the first common parent or at some other level?
- How simple is a reorganization?
The Secret Sauce in OneStream XF
OneStream XF includes a number of pre-built dimensions that provide the power to handle sophisticated financial consolidation and elimination requirements. Specifically, OneStream XF uses the Account, the Intercompany and the Origin dimension to process IC matching and eliminations. This functionality does the following:
- Matches values between IC accounts that share a common suspense account (a.k.a. plug account)
- Automatically creates eliminations at the proper entity levels for each IC account
- Writes unresolved differences into the specified suspense account (plug account)
This functionality creates something called the “first common parent rule.” That means the eliminations are calculated at every consolidation point. Each intercompany has an “in and out” – for example, when you match a receivable and payable, they both offset through a common account.
Some consolidation applications will try to calculate IC eliminations at base entities. Others will require users to recreate eliminations for each rollup of entities. The most powerful applications all have “first common parent functionality.” It’s a basic requirement.
For each eliminating IC transaction, OneStream XF will create both sides of the entry that offsets the data value from the IC account and IC partner. That offsetting amount is written to the plug account. If the entries do in fact match, then the debit and credit for each side of the intercompany match would net to zero.
For example, if you had one entity with an IC payable and one with an IC receivable, when each entity reaches the common parent, when the elimination should take place, there’s an entry in the Origin dimension for that account that offsets the amount in the account that requires eliminating. At the same time, OneStream XF also writes a value for each offset it created, to the suspense account or plug account.
Setting this up is simple. Each IC account must be flagged for intercompany, each entity that is booking IC activity must be flagged and, finally, each combination of IC matching counts must have a corresponding plug account.
The IC dimension represents the IC Partners, which as an originating entity can post an entry against (for Intercompany flagged accounts). This is a reserved dimension that’s used by OneStream XF to track and eliminate intercompany details across the Account dimension and related User Defined dimensions.
Some features simplify the process out of the box – for example, the ability to limit the intercompany partner so that they must either enter a partner or not choose themselves.
While the settings address most basic eliminations, OneStream XF has an incredibly powerful rules engine that will address any exceptions or more complex eliminations. Here are some of the common eliminations that require rules:
- Investments in subsidiaries
- Profit in inventory eliminations
- Certain statutory eliminations
These are often not supported at all in other consolidation applications.
The configuration of these eliminations allows for something very powerful if you ever have to reorganize the company structure. You can simply move the entities and reconsolidate – done! Any system that’s using journals or manual entries or that doesn’t have shared members – will require significant work to accomplish this type of change.
Reporting on Intercompany Activity
There are some great reports that really help with viewing intercompany reporting that are ready to view “right out of the box” with OneStream. OneStream has a focused elimination grid that appears in our workflow. This allows users to comment on intercompany balances to other users.
The best reason to use these system-generated IC Reports is that the system intentionally ignores security for the intercompany accounts. Each person can see matching balances, although they don’t have access to the offsetting amounts. This feature can be helpful in getting users to take ownership of the IC matching process, which is usually reserved for the corporate consolidation team.
This workflow report not only speeds reconciliation of IC issues by helping the communication, but also auto translates for the users as the IC reports show the matching balances in both the entity and parent currencies.
If you set up the intercompany eliminations correctly in OneStream, and have your users using the IC matching report, they will be proactively resolving the issues that can slow down the close. This is yet another tool where OneStream can change the conversation of the close. It shifts the conversation from people asking, “Did you know?” or “What is this?” to people saying, “I already started resolving this” and “You will see the update soon.”
When it comes to researching and resolving issues, added members in the Origin dimension help solve intercompany issues. OneStream has “direct” and “indirect” elimination members that give an added view of elimination totals. Segment reports use the direct elimination member to show a consolidating statement of two business units, e.g., business unit A and business Unit B and the direct eliminations between them. Consolidated statements show the indirect elimination member and the eliminations from the top all the way down to the base level.
Relational Blending for Transaction Matching
The ability to support relational blending in OneStream XF simplifies the process of even reconciliation of transactional data. The OneStream XF staging table can be used to capture IC transaction detail and ensure it reconciles to balances in the trial balance. Simple custom reports can be built to handle matching of that detail. Moreover, OneStream’s “direct connect” capability provides users the ability to drill into transaction detail in any source system.
OneStream XF really is the most advanced solution in the market for enterprise-class financial consolidations. Are you considering a consolidation and reporting application to help your company manage complex intercompany activity? It would be smart to include OneStream XF in the discussion.
To learn more check out the customer case study and video on Victaulic. And please contact OneStream Software if we can be of assistance to your organization.
Peter Fugere is the Chief Solutions Architect Officer at OneStream Software where he develops and leads programs to help the team achieve highest possible customer satisfaction including; application design reviews, growing the services group, quality assurance check points, supporting partners and documenting best practices. He spends a majority of time working on strategic clients and developing solutions maximizing the value of our largest client’s investments in OneStream. Peter has spent 20 years delivering solutions for clients, including many Fortune 100 companies. He is well known for his successful book on delivering Corporate Performance Solutions. He holds a Bachelor of Arts in Economics from the University of Massachusetts, Amherst and a Master in Business Administration from Northeastern University, Boston Massachusetts.
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