Intercompany Balancing

In today's fast-paced corporate accounting landscape, effective management of intercompany balances is paramount for maintaining financial accuracy and facilitating seamless consolidations across diverse business units. The previous blog in our series on managing transactions in Workday, went into the details of Translation and Revaluation.

This third blog delves into the intricacies of intercompany accounting mechanisms, consolidation eliminations, and strategies to optimize the intercompany consolidation process. These strategies are invaluable, even in scenarios where transactions are conducted in a single currency.

Key Concept 1: Automated Intercompany Balancing in Journals

Back in my days as a G/L Accountant at a regional company (more years ago than I care to admit), intercompany transactions were a manual headache. Picture this: accountants from different divisions would manually input debits or credits into their respective intercompany accounts, leaving me to sift through the mess. I spent countless hours chasing down transaction backups and manually adjusting journal entries to balance the books. The monthly close became a marathon, with late nights spent feverishly resolving any discrepancies that cropped up in our intercompany accounts. Even without the added complexity of multicurrency transactions, ensuring no intercompany variances crept into our consolidation was a Herculean task.

Gone are the days of manual intercompany transactions that burdened accounting teams with hours of tedious work and late-night reconciliations (and GOOD RIDDANCE!). With Workday, intercompany journals can now be automatically balanced at the point of posting, revolutionizing the month-end close process. Let's illustrate this with an example:

Imagine Company A incurs office supply expenses and later reclassifies a portion of these expenses to Company B, first expensing them in account 6500 Office Supplies.  In my previous life as a G/L Accountant for Company B, my counterpart in Company A would post a journal like this:

I then would be frantically monitoring the balances between account 1900 and 2900, the intercompany liability account. As soon as I saw this $50 out-of-balance, I would need to post this journal:

Thus, when accounts 1900 and 2900 are considered together in consolidation, they would offset each other exactly. No elimination variance would occur at consolidation.

This entry would be but one of possibly thousands, and that was just in this single intercompany pair. In a large organization comprising many separate companies (especially those across borders and currencies) this high-volume, manual handling of intercompany can slow down the month-end process and can be the cause for elimination variances.  However, by leveraging Workday's auto-balancing mechanism, you can significantly reduce manual efforts for your organization and eliminate the risk of intercompany variances during consolidation.

INTERCOMPANY JOURNAL BALANCING IN WORKDAY

In the realm of Workday, there's a smarter way to handle such transactions: the Direct Intercompany journal. This nifty tool allows you to streamline the process by posting a single journal entry across both companies, leaving the task of intercompany balancing to the capable hands of Workday itself.  Here is what the user would enter in Workday, with Company A as the header company:

Note the entry is not balanced by company, and that is fine. When this entry is posted, Workday will create additional lines and post this transaction as 2 separate journals, deriving the balancing lines via the Account Posting Rule configuration:

Here’s the win: these system-generated entries seamlessly balance each other out, ensuring no elimination variance during consolidation. Gone are the days of sleep-deprived accountants painstakingly clearing every penny in intercompany transactions. By leveraging this auto-balancing feature, organizations can significantly cut down on manual efforts in this domain.

Key Concept 2: Understanding Intercompany Eliminations in Workday

Workday provides powerful tools for automating intercompany eliminations, seamlessly performing calculations at runtime as consolidated reports are generated. This sophisticated elimination engine follows the guidelines set in the Elimination Rules, dictating which ledger accounts are eligible for elimination and determining how any variances between accounts should be handled. Let's call this discrepancy an "Elimination Variance."

Consider a simple example of Company A holding a receivable from Company B in the amount of 1,000 Euros. A Trial Balance will look like this:

Note:  In this scenario, we're assuming a single currency – both companies using EUR as the Ledger Currency.) When account 1900 and 2900 are included in the Elimination Rule, Workday examines these accounts along with the Intercompany Affiliate worktags associated with the data. If the Intercompany Affiliate company falls within the same hierarchy as the one selected at runtime for the report, Workday omits these journal lines from the consolidated output of the final report. The Intercompany Affiliate tag plays a crucial role here: eliminations occur only if the Intercompany Affiliate is specified on the journal lines, and they will proceed without any variance only if the amounts are equal and opposite at the time of consolidation.

BEST PRACTICES FOR MAINTAINING INTERCOMPANY BALANCES IN WORKDAY

To enhance efficiency and accuracy in intercompany processing, consider the following best practices:

1. Restrict Manual Journal Entries Directly to Intercompany Ledger Accounts: Implement strict Custom Validations to prohibit manual entries directly into intercompany ledger accounts, promoting the use of direct intercompany transactions.  This maintains the integrity of intercompany balances even if posting across multiple transactional currencies by treating them as control accounts.
   

2. Require Intercompany Affiliate Worktag in Certain Accounts: For any account in the elimination rules, consider a Custom Validation that will require that manual journals always have an Intercompany Affiliate. Ideally you won’t be posting here manually at all, but should manual corrections ever be needed, this additional rule will ensure proper elimination.
   

3. Invest in Training: Provide comprehensive training to finance teams on Workday's intercompany functionality to empower them to make informed decisions.
   

4. Regular Reconciliation: Develop reconciliation reports to monitor intercompany balances regularly and incorporate this review into the monthly close process.

Conclusion

Mastering intercompany balancing in Workday requires a blend of automation, robust processes, and ongoing vigilance. By adopting best practices such as direct intercompany journals and stringent control measures, organizations can streamline their monthly close while minimizing consolidation variances.

Stay tuned for our next post, where we'll explore intercompany transactions in multi-currency scenarios and strategies to mitigate associated challenges.

Author: Brady from Arizona