Managing intercompany accounting for global or multi-entity companies is full of complexity, from regulatory compliance to financial risks.
So, when you have to perform extra manual tasks to ensure arm’s length compliance for intercompany transactions, this creates an additional burden on already strained accounting teams.
Yet arm’s length transaction compliance is crucial for businesses as it ensures audit readiness and protects against financial risks.
This means you can’t take shortcuts when it comes to arm’s length compliance, but you can do it more efficiently with automation.
This blog post will show you how automation can transform intercompany accounting by reducing errors, creating an audit trail, and scaling operations efficiently.
What is an arm's length transaction?
An arm’s length transaction refers to a transaction between two unaffiliated parties where each party is acting in their own best interest and has equal bargaining power. This allows both parties to agree on fair market terms in their transaction.
Arm’s length transactions in intercompany accounting
In certain jurisdictions, regulators require multi-entity companies to treat intercompany transactions as if they occurred between two unrelated parties. This includes setting transfer pricing for the intercompany transaction, meaning the price for the transaction is the same as it would be for unrelated companies.
The arm’s length principle helps ensure that the agreed-upon price of an intercompany transaction is close to the fair market value and that the transaction is tax-compliant.
Part of demonstrating arm’s length compliance means that for every intercompany invoice, there must be a corresponding vendor bill to prove adherence to the arm’s length principle. Failing to comply can result in fines, impact investor trust, and invite regulatory scrutiny.
For accounting teams, this often results in meticulous manual tracking for intercompany transactions — but manual methods are not foolproof. They leave room for error and can expose the company to unnecessary risks while creating inefficiencies.
The challenges of arm's length compliance
While following arm’s length compliance is vital, when done manually, it comes with challenges for accounting teams:
- Heavy manual workload: Creating vendor bills and linking them to invoices manually within your enterprise resource planning platform (ERP) takes a lot of time for accounting teams. And an inefficient manual process can ultimately increase operational costs.
- Compliance risks: Manual processes always come with a risk of errors. They also make it harder to keep a proper audit trail, leaving companies vulnerable to audit issues and financial risk from non-compliance penalties.
- Lack of visibility: When vendor bills are created manually, CFOs and controllers often lack insight into intercompany accounting processes. This means they don’t have the data and visibility they need for decision-making.
- Scalability: As companies grow, so does the volume of transactions, overloading accounting teams with manual work. This drains time and resources from the accounting team that could be better spent on strategic initiatives for the business.
Intercompany arm's length transaction example
To get a better idea of the work involved, let’s go through an example of an intercompany transaction for a multi-entity company using NetSuite as their ERP.
Let’s say the parent company Tech USA has a subsidiary, Tech Australia. The parent company provides IT consulting services to the subsidiary, and to comply with arm’s length standards, they charge this service at a fair market price of $10,000.
The step-by-step intercompany accounting process for this in NetSuite might look like this:
- Tech USA creates an intercompany invoice in NetSuite for $10,000 to bill Tech Australia for the IT consulting services.
- The Tech Australia accounting team manually creates a corresponding vendor bill to match this invoice.
- The Tech USA accounting team documents a pricing justification and intercompany agreement and manually links the invoice to the vendor bill to ensure arm’s length compliance.
- Tech Australia processes the vendor bill payment to Tech USA, marking the transaction as cleared and reconciled in NetSuite.
When you’re managing a high volume of transactions, this can turn into a time-consuming process that leaves room for manual error. Plus, there’s a lack of centralized visibility, which makes monitoring difficult.
Ensuring compliance across subsidiaries ends up requiring a lot of time and coordination on the accounting team’s part.
Intercompany accounting best practices
If you do this type of intercompany accounting regularly, you’re probably familiar with the challenges we’ve discussed so far, so let’s get into how to improve the process.
The following best practices for compliance and efficiency can help CFOs and controllers transform the process.
1. Standardize the vendor bill creation process
Don’t leave any part of the process open to interpretation. This will only lead to inconsistent documentation, which will make audit season more challenging.
Create and document a standard process for creating vendor bills and linking them to the correct intercompany transactions. This will give your team clarity on the process, whether it’s their first time or their hundredth, and result in organized documentation.
Automating the process within your ERP can make standardization much easier — more on that in a moment.
2. Create a complete audit trail
A standardized process will ensure that all team members link invoices to vendor bills systemically. This will make it easy for you and auditors to access the appropriate documentation when they need it. The result is a robust audit trail, a smooth audit, and proven compliance with arm’s length standards.
This is another area where automation can help.
3. Rely on technology to simplify the process
Manual processes come with hidden costs — like failed audits, financial penalties, and burnt-out accounting team members. Automation can alleviate these pressures.
With the right accounting automation solution embedded in your ERP, you can bridge the gaps that require manual work and free up your team’s time for higher value activities. Plus, you’ll get real-time visibility into intercompany transactions and can monitor performance from a centralized location.
The key to effortless compliance: Intercompany vendor bill automation
Automating vendor bill creation is a game changer for accounting teams, transforming the intercompany transaction process from a manual burden to a seamless task.
Automation solutions like Shared Transactions can automatically create a vendor bill as soon as there’s a new intercompany invoice in your ERP. This saves your team valuable time while providing a scalable solution that can keep up with a growing number of transactions.
The four-step process we discussed in the example above becomes a single step: Create your invoice, and the rest happens automatically.
Plus, those hidden costs of manual processes disappear when you can help your team work more efficiently and allocate their time to high-value work.
Meet Netgain’s Shared Transactions
As your business grows, so can the stress of compliance. Adopting an automation solution helps you standardize your intercompany accounting process and ensure arm’s length compliance while reducing costs.
The right automation solution should make your work easier — not more complex. That’s why a solution that’s native to your ERP can be such a game changer. It brings all the benefits of automation without the complexities of cumbersome integration.
Meet Shared Transactions, a NetSuite-native solution that supports arm's length compliance for every intercompany transaction. With Intercompany Vendor Bill Automation, Shared Transactions automatically creates matching vendor bills for intercompany invoices directly in NetSuite.
Your team can say goodbye to manual vendor bill creation while maintaining an accurate, real-time link between invoices and bills for seamless compliance. This means you’ll:
- Save time and reduce manual workload (and associated costs).
- Improve financial control with automatically aligned invoices and vendor bills.
- Minimize compliance risks by ensuring accurate and timely records.
- Improve audit readiness with a built-in audit trail.
To see it in action, click through the interactive demo or request a personalized demo to see firsthand how you can save time, reduce errors, and ensure compliance with arm’s length standards.
