Intercompany

Intercompany refers to transactions, balances, and agreements between entities that are part of the same corporate group, such as a parent company and its subsidiaries or affiliates. Intercompany activity covers sales and purchases of goods and services, intercompany loans and interest, royalty and service fees, cost allocations, and the transfer of assets. These transactions enable centralized financing, shared services, and coordinated operations across the group but require careful controls and documentation to avoid distortions in financial reporting and tax exposure.

In accounting, intercompany transactions are eliminated in consolidated financial statements to prevent double counting of revenues, expenses, assets, and liabilities. Standards such as IAS 24 Intercompany Transactions and US GAAP guidance provide requirements for disclosure, pricing, and elimination. Transfer pricing rules govern the pricing of cross-border intercompany transactions to reflect arm's-length terms and to satisfy tax authorities; many jurisdictions require documentation and periodic adjustments.

Effective intercompany governance relies on formal agreements (intercompany master service agreements, loan agreements, and royalty contracts), standardized billing, and timely intercompany reconciliation. Companies often implement intercompany netting and centralized treasury operations to optimize cash and reduce settlement risk. Frequent challenges include mispricing, timing differences, and unrecorded settlements, as well as compliance with VAT/GST and withholding tax rules.

Technology plays a key role, with enterprise resource planning and shared services platforms providing master data alignment, real-time visibility, and automated intercompany matching. Overall, intercompany structures aim to enable efficient intra-group operations while maintaining accurate reporting and compliant tax treatment.