Question

How important is intercompany activity on decisions to form business combinations? We see intercompany transfers quite often between companies involved in a business combination. Why do you feel that this happens so frequently? Is this ever a concern to the investors, controlling and noncontrolling?

Answer 1

Intercompany activities arises when the unit of a legal entity has a transaction with another unit within the same entity. Intercompany accounting is a set of procedures used by a parent company to eliminate transactions occurring between its subsidiaries. For example, if one subsidiary has sold goods to another subsidiary. Intercompany transactions can be essential to maximizing the allocation of income and deductions.

The importance of intercompany transactions to form Business Combinations and why this happens so frequently:

During business combiantions ; Intercompany transactions can help improve the flow of finances and assets greatly. Intercompany activities play a major role in business combinations decisions. Advantages include: achieving economies of scale, cost synergies/savings, and more efficiency. Companies and internally combine divisions or could each find purposes for a business combination. Intercompany transactions accounting can help keep records for resolving tax disputes, especially in countries where the markets are new and there are little or no regulations governing related party transactions. Here are few areas affected by the use of intercompany transactions:

• Loan and borrowings participation i.e.f intercompany receivables and payables (intercompany debt).
• Sales and transfer of assets
• unrealized gains on inventory transfers between parent and subsidiary
• Dividend

-Yes, This is a concern to the investors, controlling and noncontrolling interest holders.

-Intercompany accounting can be one of the key bottlenecks in the process of closing the books for a parent company, and so should be a focus of management attention to find ways to streamline the process.

- Many companies take advantage of intercompany transfer pricing and other related party transactions to promote improved intercompany transaction taxes, and effectively enhance efficiency within the company.

-  if one subsidiary has sold goods to another subsidiary, this is not a valid sale transaction from the perspective of the parent company, since the transaction occurred internally. Consequently, the sale must be removed from the books at the point when the consolidated financial statements of the parent company are being prepared.

- Intercompany transactions can be flagged in an organization's accounting system at the point of origination, so that they can be automatically backed out when the consolidated financial statements are prepared.