Finance Transformation
The Intercompany Problem: Why Multi-Entity Businesses Get This Wrong
1 September 2025
The moment a business establishes a second legal entity, it inherits a set of financial management requirements that did not exist before. Intercompany transactions need to be recorded in both entities. Intercompany balances need to eliminate on consolidation. Intercompany loans need interest. Intercompany sales need to be on arm’s length terms. The entity providing management services needs to charge for them correctly.
Most businesses that establish group structures understand this in principle. In practice, the intercompany workings are often the least well-managed part of the finance function, and they accumulate complexity and error quietly until a consolidation, an audit, or a tax review makes the problem visible.
The most common intercompany errors
Transactions recorded in one entity but not the other. An intercompany loan repayment processed in the parent but not in the subsidiary produces a balance sheet difference that will not reconcile at consolidation. It sounds obvious. It happens constantly, particularly where the two entities have separate finance teams or separate systems that do not communicate automatically.
Intercompany balances that do not agree. At any point in time, what entity A believes it owes entity B should be the same as what entity B believes entity A owes it. In practice, timing differences, unrecorded transactions, and exchange rate treatment produce mismatches. These mismatches become consolidation adjustments, and consolidation adjustments that cannot be explained create audit queries and, occasionally, restatements.
Interest not charged on intercompany loans. A loan between two group companies should carry an interest rate that reflects arm’s length terms. Where it does not, tax authorities in both jurisdictions may question the arrangement. The interest that should have been charged creates a deemed payment with tax consequences. This is a transfer pricing between group entities issue, which compounds the complexity.
Intercompany sales not eliminated on consolidation. Revenue recognised in one entity from a sale to another entity in the same group is not revenue from the perspective of the consolidated group. It eliminates. So does the corresponding cost. Failing to eliminate intercompany trading produces overstated revenue and overstated cost of sales in the consolidated accounts, with the profit broadly correct but the gross margin percentage distorted.
No intercompany agreement. Many intercompany arrangements, management service charges, licences, loans, exist in practice without a written agreement. The arrangement is real, the charges are being made, but there is no document setting out the terms. This creates problems on audit, on tax review, and particularly on any transaction involving the group where a buyer’s due diligence team expects to find documentation for every intercompany arrangement. Managing intercompany queries in audit is significantly easier when the agreements exist.
What good looks like
Every intercompany arrangement should be documented in a written agreement, reviewed annually, and priced on arm’s length terms. The agreement should specify the nature of the service or arrangement, the pricing methodology, payment terms, and the currency.
Every intercompany transaction should be recorded simultaneously in both entities. Where this is not possible due to system limitations, a defined reconciliation process should run monthly and differences should be investigated and resolved before the month is closed.
At month-end, intercompany balances should be agreed between entities before consolidation runs. This means a defined intercompany confirmation process: entity A sends its balance to entity B, entity B confirms or raises a query, differences are resolved before the consolidation is completed.
The consolidation pack
For groups that consolidate manually, a consolidation pack that captures each entity’s trial balance, the intercompany transactions for the period, and the agreed intercompany balances is the tool that makes the process repeatable and auditable.
Consolidation in a spreadsheet is manageable for simple group structures. It requires discipline around the process, clear version control, and a review by someone who understands what they are looking for. A system-generated consolidation is more reliable and worth the investment once the group structure justifies it. Choosing systems that handle multi-entity consolidation natively saves significant manual effort.
Maebh Collins is a Chartered Accountant (FCA, ICAEW) with direct experience building and managing consolidations across multi-entity groups with operations in multiple jurisdictions.
Maebh Collins is a Chartered Accountant (FCA, ICAEW), Big 4 trained, with twenty years of experience building and running international businesses. She specialises in finance transformation, ecommerce operations, and digital strategy.