The NetSuite intercompany elimination process provides a facility to automatically eliminate certain intercompany balances for consolidated reporting.
Within a group, subsidiaries may need or want to trade with each other. The result of this means the reporting of expenses and revenues that make sense at an individual subsidiary level, but do not at a consolidated group level.
Businesses will want to eliminate these balances at the group level whilst still keeping the impact visible within the component subsidiaries.
In most scenarios the balances that groups will want to eliminate fall in to the following categories.
- Intercompany Expenses and Revenues.
- Intercompany Loans.
- Stock Ownership.
Some accounting systems will require the users to keep track of these transactions and make adjustments for their consolidated reporting.
NetSuite OneWorld accounts can track intercompany transactions for you and then automate the posting of elimination journals.
In this article I will walk you through the set up required to start using the Automated Intercompany Management feature. I will explain the different ways to post intercompany transactions and how to run the elimination process.
|THERE IS A LOT OF INFORMATION HERE – For more digestible nuggets head straight down to the FAQ or use the table of contents above to skip to the most useful part for your needs.
The NetSuite Intercompany Elimination Process Setup
There are a few different steps to preparing NetSuite for automated intercompany eliminations.
If you are undertaking a NetSuite implementation, raise this with your lead consultant. It is best to configure this from the outset rather than go back and make these changes at a later stage.
In order for the automated eliminations to work, you will need to configure the following –
- Ledger Accounts – Identify the accounts you want to eliminate balances on.
- Customers and Vendors – If you want to trade intercompany and post balances to AR and AP, you will need to set up intercompany customers and vendors.
- Items – Consider what items will be used to buy and sell internally.
- Elimination Subsidiaries – An elimination subsidiary is a separate entity in NetSuite that is used only for elimination journal entries.
Account Setup for Intercompany Eliminations
When recording an intercompany transaction, you will need to use an intercompany account. Intercompany accounts are accounts that are configured to Eliminate Intercompany Transactions.
On the account set up there is a checkbox labelled Eliminate Intercompany Transactions.
Accounts can be dedicated intercompany accounts or shared accounts that hold external trade transactions also. Intercompany Accounts Receivable and Intercompany Accounts Payable, however, should be used to record only intercompany transactions eligible for elimination.
Normally businesses will be looking at creating intercompany Accounts Receivable, Accounts Payable, Income and Expense accounts.
The following account types cannot be made intercompany –
- Unrealized Matching Gain/Loss
- Unrealized Gain/Loss
- Realized Gain/Loss
- Rounding Gain/Loss
- Exchange Rate Variance
- Cumulative Translation Adjustment-Elimination
- Cumulative Translation Adjustment
- Undeposited Funds
- Intercompany Clearing XXX (deferred Cost of Goods Sold (COGS))
|For detailed information on how each account type can be used for intercompany purposes visit this NetSuite Help article.
Representing Customers and Vendors Setup
If you will be buying and selling goods and services then intercompany customers and vendors are required. These are also known as Representing Entities.
In order to eliminate properly, accounts receivable and accounts payable transactions must be posted against an intercompany customer and vendor.
The set up of the customers and vendors can be done automatically through the Automated Intercompany Management feature. You will first need to enable this.
Navigate to Setup > Company > Enable Features and under the Accounting tab enable Automated Intercompany Management.
With this feature enabled you will have a new page available under Setup > Accounting > Intercompany Preferences.
Here you can automatically create all your intercompany entities.
I would advise using a prefix for your representing entities. This will make them much easier to find in drop downs for your intercompany transactions.
If you are unable to use the automated entity generation you can also create representing entities manually. You will need to edit the customer and vendor forms to make visible the Representing Subsidiary field.
In this field you need to enter which subsidiary the customer or vendor is representing.
Whether you have created these entities manually or through the automated process, once complete you will see them linked to the corresponding subsidiary on the Subsidiaries page.
Intercompany Items Setup
If sales and purchase transactions are going to be used for intercompany trading, then you will need to consider item management.
As a minimum you need to ensure items are live for both the subsidiaries in question.
If an item has only ever been used for sales but you are now selling to another company in your group, this item type may not be sufficient. If an item is being used for both sales and purchase it needs to be a Resale item. This applies whether you are using inventory or non-inventory items.
If you are trading intercompany with inventory items then there are more considerations and additional processes you may need to carry out. These are outside the scope of this article so please visit this NetSuite Help page to learn more.
Elimination Subsidiaries Setup
The final step to set up your NetSuite intercompany elimination process is to create the elimination subsidiary.
The elimination subsidiary is used to post journal entries that will balance out the consolidated group reporting. They look like a legal entity in your list of subsidiaries but they act very differently.
|Only journal entries can be posted to elimination subsidiaries. No other transaction type can be posted.
Elimination subsidiaries do you not count towards your total subsidiary number for system limitation and billing purposes.
You cannot select elimination subsidiaries on bank accounts, credit card accounts or item records.
If you are running the automated intercompany management step in your period close checklist (which we will cover in more detail below), then elimination journal entries will be posted automatically to this subsidiary.
You want to set up an elimination subsidiary for each ‘level’ of your group. This gives the system the ability to eliminate balances at each level of consolidation.
See the example below of where we would place an elimination in a 3 level group.
To create an elimination subsidiary navigate to Setup > Company > Subsidiaries > New.
Populate the Name, Parent Subsidiary and check the Elimination checkbox. Country, Currency and Edition will all be defaulted and locked.
As this is not a real legal entity, not much information is required. You can now Save the record.
Additional Features of Automated Intercompany Management
The following are points you should be aware of but do not require any immediate action or setup. These are all items added as part of the Automated Intercompany Management feature.
Period Close Checklist – A new step will be added to your period close checklist called Eliminate Intercompany Transactions. This step is used to generate the automated elimination journal entries.
Cumulative Translation Adjustment-Elimination (CTA-E) – This account will be added to your chart of accounts after creating the first elimination journal entry. This account acts as a clearing account and tracks foreign currency translation adjustments.
Eliminate column on journal lines – A column with an Eliminate checkbox is added to journal forms. This is used to let the system know which lines should be eliminated.
Posting Eligible Intercompany Transactions for Elimination
As previously mentioned there are two main ways to record intercompany transactions.
- Advanced Intercompany Journal Entries (AICJE).
- Sales and Purchase Transactions.
If trading inventory, you can also consider whether the transaction is arms length or non arms length. For non arms length inventory transfers you may choose to use the Intercompany Transfer Order process.
We are not covering inventory in detail in this article so will focus on the AICJE and Sales and Purchase Transaction flows.
Advanced Intercompany Journal Entry
An Advanced Intercompany Journal Entry is similar to a regular journal besides one key difference. You are able to enter lines for more than one subsidiary on the same record.
The benefit of using this method as opposed to two separate journals is that the matching is clear and balancing is enforced. If you are using two separate journal entries, you run the risk of having unmatched entries that do not balance across the group.
Using the AICJE you are also able to select an originating subsidiary for funds and multiple receiving subsidiaries which would otherwise be incredibly difficult to manage and reconcile.
To create an AICJE navigate to Transactions > Financial > Make Advanced Intercompany Journal Entries.
Assuming you already know how to create a regular journal in NetSuite, simply consider the following additional points when entering an AICJE –
- Subsidiary – In the header of the record select the subsidiary initiating the transaction.
- Currency – Using the AICJE you can select any currency set up in your system. If this is different to the base currency of a subsidiary used on the transaction, exchange rates will be displayed on each individual line.
- Line : Subsidiary – Enter the subsidiary for each line of the journal entry. debits and credits for each subsidiary must balance.
- Line : Eliminate – After selecting an intercompany account, the Eliminate checkbox will be marked. This indicates which values will be picked up for elimination.
- Line : Entity Name – For lines posting to an intercompany accounts receivable or accounts payable account, select the relevant representing entity.
- Line : Due To/From Subsidiary – for receivable and payable amounts, select the due to/from subsidiary. If a representing entity has been selected, this field will default.
Once complete, click Save on your advanced intercompany journal entry.
Intercompany Sales and Purchase Transaction
If you are required to complete the sales and purchase cycle for intercompany trading you will need to add an additional step to ensure these transactions are paired.
Raise a purchase order as normal but consider the following points –
- Name – Select the relevant intercompany vendor.
- Item – Use an item that is available for resale so it can be selected on the corresponding sale order.
Once the purchase order is complete, navigate to Transactions > Sales > Manage Intercompany Sales Orders. Here you will see listed all intercompany purchase orders in a Pending or Rejected state.
Select the customer, subsidiary and currency for the sales order to be created with. Mark the relevant purchase order and click Generate Sales Order.
Once the transaction has been generated you will have a paired sales order under the selling subsidiary.
These two transactions can then be processed as normal until there are posting values for revenue and cost that need to be eliminated.
Running Intercompany Elimination
When month end rolls around, you will be working through your period close checklist and you’ll notice a new step. Eliminate Intercompany Transactions.
This step is the trigger that will identify the eligible intercompany transactions and post elimination journal entries for them.
Click in to the step and select Run Intercompany Elimination.
If you choose you can then select a Department, Class and Location and enter a Memo to be used on the elimination journal entry lines. Finally, click Save and you will return to the previous page.
The Results tab will link through the generated journal entries. The Status tab will display 100% in the Percent Complete column once the process is finished. You can then select Mark Task Complete.
The Intercompany Elimination Journal Entry
The autogenerated elimination journal entry is fairly similar to a regular journal. The transaction is posted to the relevant elimination subsidiary.
There is a new Source Transactions column that links through to the source transaction for each line.
To see the impact of the elimination you can view your financial statements split out by subsidiary.
Frequently Asked Questions
What are the steps required to set up the automated NetSuite intercompany elimination process?
- Enable the Automated Intercompany Management feature.
- Configure intercompany ledger accounts.
- Create Representing Entities.
- Create Elimination Subsidiaries.
- Configure Items to be used to trade intercompany.
What is the Intercompany Elimination report in NetSuite?
The Intercompany Elimination report shows processed eliminations for a given period and links through to all source transactions.
How do I create an Elimination subsidiary?
Elimination subsidiaries are created in the same way as regular subsidiaries. They are identified by checking the Elimination checkbox. When this is ticked, the currency and country cannot be changed and they will only allow journals to be posted to them.
Is there an additional cost for Elimination subsidiaries?
Elimination subsidiaries to do not count towards your total number of subsidiaries so there is no additional cost.
Where do I run the automated intercompany elimination?
The NetSuite intercompany elimination process can be triggered from the period close checklist under the step labelled Eliminate Intercompany Transactions.