Intercompany Entries: Now You
Every deal between two group companies is booked twice, once in each company's books. Book the Distributor's and the Entrepreneur's entries yourself, with less help each round.
First, a guess
The US Entrepreneur designs the product, owns the IP and is the PrincipalThe group company that makes the key decisions, owns or controls the valuable assets such as IP, and bears and controls the main business risks. It keeps the residual profit or loss.Open in the Glossary. It sells finished goods to the Canada Distributor, which resells them to customers in Canada. The Distributor carries little risk and earns a Routine returnA modest, steady profit for low-risk activities such as contract manufacturing, distribution, or support services, set by reference to comparable companies.Open in the Glossary: a 3% Operating marginOperating profit divided by sales. It is the most common profit level indicator for distributors.Open in the Glossary. The Distributor keeps its books in Canadian dollars (CAD), the Entrepreneur in US dollars (USD).
Book both sides
Round 1 is done for you. Round 2 is half filled. In round 3 you book it all. Tap an account, then tap the line it goes on (or the other way round). The amounts are given.
During the year, rate 1.35
The Entrepreneur sells to the Distributor
The Entrepreneur ships finished goods to the Distributor and sends an invoice for CAD 810,000. The invoice is in Canadian dollars, the Distributor's own currency. The Distributor will pay later. At 1.35 Canadian dollars per US dollar, the invoice is worth USD 600,000 to the Entrepreneur.
The Distributor's books
CAD, Canada, limited-risk distributor- 810,000
Given. The Distributor now owns the goods. They sit in inventory until it sells them to its Canadian customers.
- 810,000
Given. The Distributor owes the Entrepreneur. Money owed to a group company goes in its own intercompany account, so it can be matched and removed later.
Do the two books agree?
Distributor's CAD at 1.35 CAD per USD
Owed between them (balance)
They agree
Sale and cost, this entry
They agree
The Entrepreneur's books
USD, US, principal- 600,000
Given. The Entrepreneur is owed the money. This is the twin of the Distributor's payable: CAD 810,000 at 1.35 is USD 600,000.
- 600,000
Given. The Entrepreneur has made its sale. It is intercompany revenue because the buyer is in the same group.
The Entrepreneur also moves its own USD 500,000 cost of making the goods out of inventory and into cost of goods sold. That entry is only inside the Entrepreneur, so it has no twin and is left out here.
Two books, one deal
Every intercompany entry has a twin in the other company's books. The Entrepreneur's receivable is the Distributor's payable. The Entrepreneur's intercompany revenue is the Distributor's cost of the goods. Because the Distributor counts in CAD and the Entrepreneur in USD, the twins match once you convert at the same rate. See the full entries in the guide for the Distributor and the Entrepreneur.
The invoice is in CAD, the Distributor's own currency, so only the Entrepreneur carries the currency risk. When the Canadian dollar weakened from 1.35 to 1.40, the CAD 810,000 was worth only USD 578,571, and the Entrepreneur booked a USD 21,429 loss. The Distributor booked no gain or loss. That is a deliberate choice: a limited-risk distributor should not carry the currency risk, so the risk sits with the principal.
When the group adds the two books together, the twins cancel out. A group cannot owe money to itself or sell to itself. That only works if both sides agree, which is why groups check them every month. Consolidation in the guide shows the elimination entries. The panel above converts each round at the rate on that day. Many groups use the year's average rate instead, and the guide shows the small CTA (cumulative translation adjustment)The part of equity that collects gains and losses from translating a foreign subsidiary's books into the parent's reporting currency. It stays out of profit until the subsidiary is sold or liquidated (ASC 830).Open in the Glossary gap that creates.
The True-upAn adjustment, usually at year end, that moves an entity's actual profit back to its target transfer pricing result. In the US, a true-up can be reported on a timely filed return, but a late or amended return cannot be used to lower taxable income this way (Treas. Reg. § 1.482-1(a)(3)).Open in the Glossary pulls the Distributor back to its 3% target when actual results drift. The Distributor books it to cost of goods sold and the Entrepreneur to intercompany revenue, so it lands in the operating margin that is tested, not in a non-operating account. In the US, a true-up you make yourself must be reported on a timely filed return (extensions count). This one lowers the Entrepreneur's US taxable income, and a late or amended return cannot be used to do that. It can also change the customs value of goods the Distributor already imported into Canada.
Source: Treas. Reg. § 1.482-1(a)(3), taxpayer-initiated adjustments and the guide's practical pointers
Check yourself
Three quick questions. Each answer explains itself, right or wrong.
0 of 3 answered.