Intercompany elimination report is a very useful tool in analyzing intercompany balances. Plug Accounts play a major role as they store differences in intercompany balances and they group accounts with the same Plug Account in the Report. This allows HFM to match balances between Entities and the related Intercompany Partner.
How do we get rid of the amounts shown in the Plug Accounts?
In a perfect world, Plug Accounts always have a zero balance. In reality, you cannot get rid of the amounts shown in the Plug Accounts because they are indicators of the problem. Fix the problem and the amount in the Plug Account clears.
In the sample report below, Item 1 shows zero difference as the balances between DD Corp and AA Corp in the amount of USD 92,346 perfectly match.
The major reasons for differences are:
- Timing difference – If US based company, AA Corp, ships to a sister company in Asia, BB Corp, it has to recognize that shipment has been made. In AA Corp, there will be a debit to AR – Interco. Since BB Corp has not received the goods, it has not booked the transaction for AP – Interco, resulting into the difference of -28,639 as shown in the sample report, item 2 below. To correct this imbalance, BB Corp needs to recognize the transaction by debiting Goods in Transit and crediting AP – Interco. Part of the monthly close process should be an intercompany balance reconciliation to avoid similar timing difference.
- Foreign currency rate difference – It is possible that both sister companies have recognized the transactions but one of them used a different exchange rate. To correct this imbalance, the entities should follow the currency designated in the transaction. If it is stated in USD, the Partner Company, EE Corp, needs to adjust its books to match the dollar amounts shown on the invoice. In the sample report below, item 3 shows that AA Corp has an AR Interco of 13,383,537 while its partner, EE Corp has an AP – Interco of 13,385,890 resulting into an imbalance of -2,353. Assuming that the contract is stated in dollars, EE Corp must adjust its books to match AA Corp’s amount. This will clear the difference.
- Erroneous account was used – Please refer to item 4 in the sample report below. Both entities booked matching amounts. DD Corp appropriately used AR – Interco but its partner used Advances – Interco instead of AP – Interco. Since Advances – Interco has a different Plug Account, for example AdvFrom_To, the receivable will show up in the AR_AP report while the payable will show up in the AdvFrom_To report. Both reports have an offsetting out of balance numbers, in this example, 986,237 and -986,237. To clear this imbalance, EE Corp needs to move the liability from Advances – Interco to AP – Interco.
- Erroneous ICP was assigned – In sample report below, Item 5, the balances were supposed to be between FF Corp and GG Corp. Due to an error, FF Corp assigned DD Corp as ICP. The report shows an imbalance of -313,637 for FF Corp and a separate imbalance of 313,677 for GG Corp. If FF Corp assigns the appropriate ICP which is GG Corp, these counterbalancing differences will clear.
