The processing and accounting for a corporate group’s internal financial activities and events that impact multiple business units and subsidiaries (as legal entities) within its structure. Such activities and events may include sales of products and services, cost allocations, royalties, fee sharing, and financing activities. As embedded in a company’s accounting system, intercompany accounting extends into various other functions, including finance, treasury operations, and tax.

Intercompany accounting involves the recording of financial transactions between two different units or more that belong to the same parent company. The transactions may occur between the parent and its subsidiaries, or between two subsidiaries within the group. The effect of this method of accounting is the elimination of financial activity that takes place between two subsidiaries (business units) or between the parent and a subsidiary (business unit). It neutralizes the potential impact of internal transactions on a company’s bottom line, and hence the parent can prepare financial statements and filings that only reflect business activity conducted with external parties.

This can provide a clear picture of a company’s actual financial performance and reporting results, without being impacted by internal transactions that do not produce any gross or net financial gain or loss at the parent’s level. Furthermore, intercompany accounting can help an entity ensure the accuracy of tax filings as well as compliance with accounting and reporting standards.

As a framework, intercompany accounting may involve multiple areas such as intercompany pricing, data management, transaction management, netting and settlement, reconciliation and elimination, internal and external reporting, and governance and policies.

For example, intercompany pricing may involve establishing a global pricing policy. As a subprocess it integrates transaction-level pricing and analytics. Certain functions may be integrated, such as tax and finance. A company can interconnect both functions to determine appropriate arm’s-length pricing.

It is known for short as ICA.