Intercompany netting: settling the net balance
How corporate groups offset mutual subsidiary balances, reduce gross settlement flows and focus on the amount that remains payable.
By Amanda Ross · Deals Correspondent
· 3 min read
Intercompany netting offsets receivables and payables between entities owned by the same parent, so that the parties settle the remaining net difference instead of each gross amount. The approach can reduce internal payment flows and open balances; in cross-border groups, it can also reduce the foreign-currency amount left to manage or hedge.
The calculation identifies the reciprocal balances between group entities, offsets them and establishes which entity owes the residual amount.
How intercompany netting works
In a bilateral arrangement, each entity may owe an amount to the other. The entity with the larger receivable has a net claim after the smaller reciprocal balance is offset.
A bilateral example
Subsidiary A owes Subsidiary B $1,000. Separately, Subsidiary B owes Subsidiary A $5,000.
- Amount B owes A: $5,000
- Less amount A owes B: $1,000
- Net result: B owes A $4,000
Oracle's NetSuite documentation uses this illustration. Before netting, the mutual balances generate four open transactions, consisting of a vendor bill and customer invoice for each amount. After offsetting $1,000 against $5,000, B owes A $4,000 and two open balance transactions remain.
A practical netting cycle
- Review open balances. Identify receivables and payables between participating subsidiaries. NetSuite's Balance Overview report, for example, displays open balances between subsidiaries in a specified transaction currency before or after netting.
- Select transactions for netting. Identify balances available for offset and select the balances and transactions to include. NetSuite also allows the system to select transactions.
- Calculate the net position. Offset reciprocal amounts and determine the residual payable or receivable for each relationship.
- Generate or arrange settlement. Settle the remaining net amount. Oracle says its functionality can automatically generate settlements, reducing inaccuracies associated with manually generated settlements.
- Review post-netting balances. Compare open balances before and after the netting run.
Why groups use it
Reducing the number of gross payment instructions can reduce payment-processing and bank-reconciliation work, international payment fees, and the volume of balances to reconcile, revalue and eliminate. Oracle lists these as benefits of using its netting functionality through an accounting period; the result for a particular group will depend on its transactions and processes.
Netting can also reduce the foreign-currency amount that remains after reciprocal flows are offset. AccountingTools says a business may hedge smaller net foreign-currency amounts rather than the gross amounts. A residual net balance remains to be settled, and any exchange-rate exposure associated with that balance remains.
Centralized netting and settlement
Some groups use a netting center. AccountingTools describes a model in which subsidiaries' intercompany transactions are combined and the net amount is paid to or received by a central netting center. Corpay describes its own product as summing and converting each entity's payments into a single local-currency amount payable to or receivable from that center.
What netting changes
- It replaces: matched receivables and payables with a net settlement position.
- It can reduce: the number of payment instructions, reconciliation activity and gross foreign-currency amounts requiring management.
- It leaves: a residual payable or receivable where the reciprocal balances are unequal.
Frequently asked questions
How does a centralized netting center settle positions among subsidiaries?
AccountingTools describes a model in which subsidiaries' intercompany transactions are combined and the net amount is paid to or received by a central netting center. Corpay describes its product as summing and converting each entity's payments into one local-currency amount payable to or receivable from that center.
Why can intercompany netting reduce FX exposure?
Offsetting reciprocal foreign-currency amounts can leave a smaller residual net position than the gross payment legs. AccountingTools says this may allow a business to hedge the net foreign-currency amount rather than gross amounts; exchange-rate exposure remains on the residual balance.
Sources
- NetSuite Applications Suite - Intercompany Netting — docs.oracle.com
- Intercompany netting definition — www.accountingtools.com
- Intercompany Netting Solutions | Cross Border — www.corpay.com