What is loan account automation?
Now that you know all about intercompany loan accounts, it’s time to reveal the unfortunate truth: they can easily fall out of balance.
What is loan account automation?
Loan account automation is the use of software to keep intercompany loan accounts in agreement across entities, rather than checking them by hand in a spreadsheet each period. It compares what one entity holds against what its counterparty holds, flags the pairs that no longer agree, shows the transactions causing the difference, and helps you post the corrections.
There are three reasons intercompany loan accounts drift apart. Loan account automation addresses all three.
Why do intercompany loan accounts fall out of balance?
Every intercompany loan balance exists twice - once in each entity’s ledger - and the two sides only stay equal if both move together. In practice, three things break that.
Reason 1: posting asymmetry
A loan of 10,000 from Entity A to Entity B may correctly be posted to the loan account in Entity A. But then incorrectly posted as income in Entity B.
Loan account automation matches the transactions in Entity A’s loan account to those of Entity B. It flags any discrepancies so that posting asymmetries can be easily identified and rectified.
Reason 2: foreign exchange
A £100,000 loan from Entity A (a UK company) to Entity B (a US company) equated to $125,000 when the loan was made. It was decided that this was a GBP loan. Exchange rates have changed so that £100,000 now equates to $130,000. The £100,000 loan and $125,000 liability will no longer net to nil on consolidation. Entity B needs to post a $5,000 foreign exchange loss so that they do.
Loan account automation pulls the relevant foreign exchange rates and enables one-click posting of the relevant foreign exchange gain or loss.
Reason 3: interest
Where interest is being charged on loan account balances, it needs to be correctly calculated and posted.
Loan account automation enables the relevant interest rates for the loan to be set with one click posting of the relevant interest amounts to each entity.
Why unbalanced loan accounts cost you at month end
A difference between two intercompany loan accounts does not stay where it is. On consolidation the two balances are supposed to eliminate against each other and net to nil, so anything that does not agree becomes a consolidation adjustment - a manual entry someone has to calculate, explain and then justify to an auditor.
Left to year end, those differences compound. Twelve periods of small posting asymmetries, unposted FX movements and missing interest become a single large intercompany reconciliation nobody wants to own. Checked monthly, each one is usually a five-minute fix while the transaction is still recent enough to recognise.
How to keep intercompany loan accounts in balance
The habits that keep loan accounts clean are straightforward, if unglamorous:
- Reconcile every entity pair monthly rather than annually, so differences surface while they are still small and traceable.
- Post both legs of a transfer in the same period and at the same value, coded to the intercompany account for the counterparty rather than to a P&L code.
- Agree and document the currency of each loan up front, then revalue both sides consistently at each period end.
- Set the interest rate on each loan once, and post interest to both entities from the same calculation.
- Keep a record of what each difference was and how it was resolved, so the same one is not investigated twice.
Without loan account automation, intercompany loans can easily fall out of balance and finance teams must face the time-consuming task of unravelling transactions to find the culprit and rebalance the accounts. Mayday Balancer, our intercompany reconciliation software, monitors your mapped loan accounts, surfaces the transactions behind any difference, and helps you post the FX and interest journals that bring the two sides back in line.
If you’d like to see how Balancer could stop your intercompany loan accounts falling out of balance, sign up for a 30 day no-card free trial today or book a demo with one of the team.