By Jeff Compton
April 12, 2018
Do some digging, and you’ll find there isn’t much accounting guidance for the presentation of intercompany accounts. To help remedy this, we performed our own survey of public company reporting.
Intercompany transactions between related parties are fairly common in the normal course of business. Examples of these include i) services received or furnished, such as accounting management or legal services; ii) borrowing, lending, and guarantees; iii) maintenance of compensating bank balances for the benefit of a related party; and iv) intra-entity billings based on allocations of common costs.
We analyzed 10-K company filings made in 2016, and found that 57 companies included a reference to both “intercompany receivable” and either “minority” or “non-controlling” interest. This indicated that not all their subsidiaries were wholly owned.
While intercompany transactions are eliminated for purposes of consolidated financial statements, 48 of these 57 companies still provided supplemental disclosures showing the amounts of the parent company’s intercompany receivable and/or payable balances. Looking at those disclosures a little more closely showed that, for 18 of the 48 companies, the parent company held a net intercompany payable. This means that, of those companies analyzed, the parent company owed the subsidiaries more than the subsidiaries owed the parent more than a third of the time. The subsidiary owed the parent 52% of the time, while 10% of the reports had no balance showing. Interest was charged on the intercompany balance 46% of the time.
The survey shows us the range of presentation used for intercompany accounts, tells us how often the parent owes the sub or vice-versa and how often interest is charged on intercompany accounts. How this information is presented, and perhaps more obviously, the fact that it’s presented at all, provides greater insight into intercompany balances generally, and allows for a more detailed analysis.
