Will the parent company’s staff have what it takes to ask the owner why the transfer was made? Will the company’s staff assume this is an intercompany loan, a payment on some kind of debt or a permanent creation of equity between the two entities? Even worse, how will the owner of the parent company know that that specific transaction is recorded properly for income tax purposes when the tax CPA prepares tax returns for the two entities? The next question was asked to the business owner, who was seeking a loan from a bank, “How can a bank have any confidence in the accuracy of your financial statements if your accounting staff can’t record the transactions within your own companies correctly?”Ĭash: Let’s imagine the owner of a parent company wire transfers $100,000 to a related entities bank account. The staff person told us that she did not know which amount was correct. We showed this problem to the parent company’s accounting staff and asked about the $100,000 discrepancy. Company #1 showed that it owed the parent company $5,000 on its accounts payable. The parent company showed that subsidiary #1 owed it $105,000 on the accounts receivable trial balance. For example, one company we know of had nine wholly-owned subsidiaries. Staff: Not every privately-held company has accounting staff who are trained and experienced enough to properly handle intercompany transactions. This causes a myriad of questions, such as, who ultimately pays the vendors? How are the payables to be properly reflected on the balance sheets of both companies, etc.? After all, the related entities may not be credit worthy and the parent company’s vendors may not want to take the credit risk of a new or newer entity. For example, does the parent company sell the inventory at cost or a markup? If the inventory is sold for a markup, how is the intercompany sales transaction ultimately eliminated in order to not inflate sales shown to the banker? If intercompany sales are made, what is the strategic plan to protect all entities from taxing authorities related to sales and/or use taxes?Īccounts payable: It’s easy for a parent company to purchase inventory and other such items from its existing vendors. This issue may become more complex if the parent company sells inventory to the related entity. This transfer of inventory is often done without any paperwork recorded in the parent company, which has an effect of overstating inventory on the parent company and understating inventory of the related entity. This has the effect of showing increases in expense to the parent company, which then begins to show lower profits.ĬOGS: It’s easy for a parent to purchase inventory that is subsequently transferred to related entities. Reasons why: The reasons are many, but the key issues relate to taking cash and other assets away from the parent company to help with other related entities, which are sometimes start-ups or other similar types of companies that do not have the financial liquidity to operate on their own without assistance from the parent company.Įxpenses: It’s easy for a parent company to incur administrative expenses (additional payroll, computers, etc.) that are not allocated to the related entities. Unintended consequences: Intercompany transactions often cause problems with the relationship between a parent company and its bankers and lenders. Definition: An intercompany transaction is one between a parent company and its subsidiaries or other related entities.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |