S&S Ltd. is still reeling from an incident that happened two years ago when one of its subsidiaries, Locks, Ltd., sold $40,000 in locks to Doors Ltd. Locks, Ltd. correctly recorded the transaction in its accounts, but Doors, Ltd. did not due to a mislabelled invoice. One simple mistake turned into a $40,000 overestimation of the profits and net assets of S&S Ltd.
When the accounting staff found the mistake, S&S Ltd. had to restate its earnings and its stock price fell and remained low for the next several months. This affected everything from investor interest in the company to executive compensation. Now, the CEO and CFO of S&S have hired a new group controller, Gregory Controllo, to avoid a repeat of this issue.
Gregory immediately notices the lack of intercompany accounting rules within S&S Ltd., such as:
- The accounting team did not identify the transaction in the Locks, Ltd. accounts as an intercompany transaction.
- Even if the team had identified the transaction correctly, management has no process in place to resolve the mismatch between the accounts.
As a first step, Gregory meets with the controllers for each of the subsidiaries of S&S Ltd. to discuss the impact of the tasks they and their accounting groups handle on a daily basis. He then works to establish a series of intercompany accounting procedures, including the creation of a group accounting calendar.
Intercompany accounting procedures require that the staff handle transactions involving nongroup entities differently than those that affect two members of the same group. By correctly identifying intercompany transactions and applying appropriate intercompany accounting procedures, S&S Ltd can avoid accounting errors that may wreak havoc on its financial performance.
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