Dynamics 365 Finance - Intercompany General Guidance

Overview 

During the implementation of Dynamics 365 Finance, incorrect setup and configuration of intercompany processes can result in excessive accounting review, reconciliation, and corrections.   

The purpose of this document is to outline how customers can implement intercompany functionality within Dynamics 365 Finance to leverage the out-of-the-box capabilities and optimize useability.  

Helpful Resource Links 

There are a couple of other separate Docs on Intercompany setup. These should be reviewed before configuring Intercompany.   

Intercompany trade 

Intercompany accounting setup 

General Guidance 

• Dynamics 365 Finance provides unique features for balancing intercompany transactions between two legal entities within Dynamics 365 Finance, but not all companies are utilizing the functionality due to lack of awareness or due to taking legacy processes from prior systems.  These features include: 

  • Intercompany trade functionality provides synchronized purchase/sales cycles with multiple legal entities (LE) pairs.  By the end of the order business flows, the intercompany transactions are in sync between the LE company pairs.  Intercompany parties can trigger the corresponding intercompany transactions from either the purchasing or sales side while following the same ordering approach as an arms-length (i.e., external) customer/vendor.  Unique intercompany setup (which is described in Docs) provides synchronized intercompany transactions.  

  • In addition to the intercompany trade functionality, journal entries that are accountant-led can be booked in a single journal entry representation from either the Due From or Due To company with automatic balancing on both LE set of books. Some companies are not taking advantage of this Dynamics 365 Finance feature as they independently record the journal entries separately to each set of books.  This introduces the risk of unbalanced Due From/Due To, caused from inconsistency in accounting entries, different timings, or errors.  While this feature exists, the accounting process does have to change when Accounting is not centralized as an accountant from one LE is indirectly posting to the General ledger in another LE.  The accounting process needs to cater for decentralizing accounting groups to take advantage of the Dynamics 365 Finance feature.   

  • Proper structuring of dedicated main accounts will help with reconciliation.  In the sections that follow, some best practices will be mentioned such as using multiple main accounts.   

     

• FastTrack Solution Architects observed that for some customers, a portion of the chart of accounts used to track internal intercompany transactions are flat accounts where the same account is repeated with the only variation representing the LE.  Ideally, a custom financial dimension will be implemented to identify the intercompany LE and the flat accounts will be consolidated to only 1 account by type.  The combination of main account + LE financial dimension will provide the three-dimensional analysis necessary without as many main accounts and give more General ledger reporting capabilities. 

   

• The use of LE as a financial dimension will be setup on the internal customers or vendors as defaulting dimensions so that intercompany sales and purchases have the respective General ledger intercompany revenue and expenses that can be filtered down to LE.  The important advantage with defaulting dimensions is that it ensures there is a process where order takers do not have to evaluate and set the LE financial dimensions on orders as they are being processed.   

   

• Intercompany accounting should be configured in a way that the configuration permits a distinction between intercompany trade and intercompany journal entries. Intercompany trade automates the journal entries and with a proper setup the intercompany receivables and payables should be in balance.  Many companies will implement only a single balance sheet account to track all types of intercompany transactions, but this can lead to a full review of every transaction when intercompany balances do not balance.  Thus, a best practice is to leverage a separate Accounts receivable – Intercompany account from general receivables and to do the same with Accounts payable – Intercompany.  These intercompany accounts will be exclusively for the Intercompany trade portion of Dynamics 365 Finance. Customer and vendor profiles will facilitate having separate accounts.   

   

• Use separate accounts for other types of intercompany transactions.  The intercompany journal entries that are accountant-led requires review and reconciliation of each journal entry.  The balance sheet Intercompany Due To/Due From accounts on the balance sheet should be separate chart of accounts from the intercompany trade to avoid commingling.  While all manually intercompany journal entries are reviewed, the vouchers on automated intercompany trade do not require the same level of review once the configuration is tested and locked.  By avoiding single Due To/Due From accounts you can separate the higher volume automated entries form intercompany trade to lessen time to reconcile.  Instead, intercompany trade variances tend to be found by reviewing open intercompany orders that are stuck.   

Customer setup 

1. Utilize a customer group(s) that represent intercompany customers.  You should consider adding a second customer group to represent related party customers where that company is on a different ERP than Dynamics 365 Finance.  This will allow segregating revenue and Accounts receivable in their own accounts, which will assist in the reconciliation process using reports from the other accounting system.

2. Ensure that all intercompany customers in each Legal Entity (LE) are changed to use the appropriate customer group. This is necessary to control the postings to the General ledger as posting groups will leverage the customer group(s). 

3. Establish systems and procedures for new customer onboarding to ensure newly setup customers have the appropriate intercompany customer group assigned and this is completed prior to sales order creation. This may be a manual process or automated depending on how customers get into Dynamics 365 Finance.  Companies who do not have a review and control process over ensuring the correct customer group is assigned will suffer from transactions that are posted to regular sales vs intercompany sales and will require after-the-fact reclassifications.   

4. Utilize customer posting profiles to control the balance sheet postings to Accounts receivable.  While Accounts receivable is typically only a balance sheet account you should segregate the receivables for the related companies as this will help with quick comparisons between the General ledger and the Accounts payable account from the other LE.  With the added financial dimension tracking LE and that financial dimension enabled on the Accounts receivable account you will be able to slice and dice the Accounts receivable and General ledger balance down to each LE.  Moreover, Accounts receivable aging reports allow for filtering by the customer group, making reconciliations easier.   

5. Utilize different main accounts on both balance sheet and income statement for any sale, cost, etc. related to intercompany.  Even VAT should be separated to aid in VAT credits between company sales.  The Customer posting profile along with Item posting setup will be used in conjunction with the customer groups to post to different accounts.   

6. Establish several types of Accounts receivable accounts to track external/vs internal and internal on different ERP systems.  They should include:  

   • Account receivable – Trade (External),  

   • Account receivable – Trade (Internal),  

   • Account receivable – Trade (Internal 3rd party systems).   

The Account receivable – Trade (Internal) account should be a mirror image of the Account payable – Trade (Internal) discussed next where these accounts are in lock step with one another using Dynamics 365 Finance intercompany trade via sales orders and purchase orders. 

Vendor setup 

• When looking at Vendor setup, every point that was mentioned earlier regarding Customer setup applies here as vendors follow the same patterns as customers.   

Posting Profiles 

• The balance sheet side of the customer or vendor groups are controlled by the Customer posting profiles or Vendor posting profile, respectively. 

   

• Item Posting rules will leverage the customer and vendor groups to post revenue, discounts, cost of goods sold, etc. to different accounts. Utilizing the Account Code of Group and the Account Relation of the customer/vendor group then the Main account will designate an intercompany chart.   

Intercompany trade setup 

The sections above are mainly focused on the drivers controlling posting journal entries to different chart of accounts.  This section focuses on the key drivers that permit intercompany trade to automate the sales or purchase order cycle between two LE’s by raising an order from either LE.  This automation is controlled via additional configuration as described in one of the Docs links shared above.  Here is a brief recap. 

• The internal customer and vendor account records will have the trading relationship defined in both directions where customer will reference another LE and vendor account and vice-versa.  This is what facilitates the intercompany trade purchases and sales to be automated.   

   

• If customers and vendors are LE specific this will allow you to leverage a new financial dimension to represent the legal entity, to be the default value on the customer or vendor record.  Then as intercompany orders are raised and vouchered the General ledger will have a main account + intercompany LE financial dimension combination giving you filtering without needing to duplicate flat accounts.  

   

• The customer/vendor records need to have Activate Intercompany trade enabled via the “Create intercompany orders.”   

   

• Additional out-of-the-box functionality exists to map terms, mode of delivery, and other values if those values are configured differently in each LE. 

   

• While testing, it is essential that full end-to-end review is done from order to journal entries making sure the intercompany trade accounts are segregated and allow for easy reconciliation.  Via testing, groups should gain the confidence that full review and reconciliation of every intercompany trade transaction is not necessary.  The configuration is essential to avoid full reconciliation.  Instead, focus should be on finding any variance and zeroing in on unposted intercompany orders on either sales or purchase side.  Additionally, variances can be caused from subsequent order adjustments or credit memos that get stuck on one LE side, but not the other.   

   

Intercompany journal entries 

• Use separate balance sheet accounts for the intercompany journal entries controlled by accountants. 

   

• Best practice is to utilize a single journal entry using the Company and Offset Company fields on journal entry lines.  There is configuration that will automatically post the respective Debits/Credits to both legal entities while balancing to Due From/Due To accounts.  Use separate Due From/Due To accounts to keep these intercompany balance sheet accounts separate from intercompany trade balance sheet accounts.   

   

• Avoid single-sided journal entries that require the inverse journal entry to be posted to the separate legal entity.  However, it may be necessary to have exceptions to this rule such as a scenario where inventory sold from one LE was sales and gross profit to that company but deemed a fixed asset in the other company.  

   

General ledger controls 

• Balance sheet accounts with subledgers like Accounts receivable, Fixed assets, etc. should block direct journal entries to the General ledger account. The Dynamics 365 Finance feature “Do not allow manual entries” that is enabled on these accounts can also be enabled on the intercompany chart of accounts on the balance sheet side.  Intercompany trade is not blocked from posting the vouchers when this box is checked, and neither are intercompany-balanced journal entries.  This control is enabled to prevent out of balance intercompany transactions, such as when someone is trying to post an intercompany journal entry without the balanced entry from the other LE. With this control, companies can limit accounts from being out of balance.    

Reporting 

• Reporting needs should be clearly defined during the testing/conference room pilot phase. End-to-end tests should expose the kind of General ledger balances being reconciled and then based on the business needs custom reports defined to represent all the data points side-by-side. When Dynamics 365 Finance reporting needs to span two or more LE’s then usually Financial Reporter, Financial Analytical Reporting (on the roadmap), or leveraging the Azure Data Lake is more appropriate.   

   

• Utilizing the Azure Data Lake with downstream reporting tools to join Dynamics 365 Finance data together from both LE’s involved in intercompany will lessen the time-consuming task of Dynamics 365 Finance exports from each LE to manually reconcile. While the Dynamics 365 Finance reports are generally intra-LE reports all the data is easily exposed in the data lake for custom reports.    

   

• As an alternative, customizations for intercompany reconciliation could also be done as custom data entities where you use Data Management Framework to export the data.    

Summary 

This blog is not a replacement to Docs nor states exact configurations.  Rather, the purpose is for FastTrack to bullet point enough considerations and guidance to give companies a time to reflect and ask questions to help plan for intercompany implementation.