What are intercompany loan accounts?
Intercompany loan accounts occur when multiple business entities, usually companies, are connected by shareholding and form a corporate group. Those related entities can be in the same country, or different ones. Intercompany loan accounts reflect monetary balances owed between those entities. They are debt balances rather than any kind of equity.
How do intercompany loan accounts work?
Related entities won’t necessarily have any balances on their intercompany loan accounts. The following are examples that would create/impact intercompany loan balances:
- Entity A loans money to Entity B
- Entity B makes a repayment of the loan to Entity A;
- Entity A may pay for something on behalf of Entity B;
- Entity A may transfer stock or equipment to Entity B without receiving payment, making a loan in kind;
- Entity A may make intercompany charges of central costs to Entity B, which they decide to let build up as loan balances rather than immediately being paid.
Loans can only be made in one currency. If Entity A is a UK company and Entity B is a US company, they will need to decide whether the loans are made in GBP or USD (or in certain unlikely cases they may choose a third currency altogether).
Interest may need to be charged on the loan balances. The arm’s length principle of transfer pricing is relevant here: what would unrelated third parties do? It’s safe to assume they wouldn’t loan each other money for free!
When all is said and done, the intercompany loan account balances should eliminate completely for consolidated reporting. When the group prepares accounts as if all entities were one single entity, intercompany loan account balances should be nowhere to be seen. They relate solely to balances within the group and should therefore net to zero. This can be a lot easier said than done. Hence the need for loan account automation.
Mayday Balancer uses loan account automation to cross-check your intercompany loan accounts and flag any discrepancies between them. With Balancer, you can easily make the relevant adjustments to keep the accounts in balance.