RSMUS.comThe 2020.2 release delivers a host of long-awaited enhancements to intercompany functionality. While some improvements target the complexities of multi-currency accounting, the new Intercompany Netting feature has the potential to benefit all multi-entity organizations operating in NetSuite.
What is Intercompany Netting?
Frequently, intercompany relationships flow back and forth, resulting in balances both receivable and payable for a given pair of subsidiaries. Rather than each subsidiary issuing payment in full for the balance due, netting describes the process of settling these mutual intercompany balances by offsetting Accounts Payable and Accounts Receivable balances to derive the net amount due/payable. The subsidiary with the ending Accounts Payable balance can then initiate payment for the balance due.
What are the benefits of Netting?
There are both financial and logistical benefits to netting. Some of the advantages include:
- Reduction in manual effort:
- Fewer transactions are revalued and eliminated at month-end
- Fewer transactions to reconcile post revaluation and elimination
- Fewer payments to process
- Reduced exposure to foreign exchange rates
- Reduced payment processing fees as a result of decreased payment volume
- Simplified period close process
Netting Example
An example helps to illustrate how two subsidiaries accumulate and settle balances within a period. (This example is intentionally simplified to bypass the fulfillment/receipt entry that would normally occur with an inventory sale/purchase).
Subsidiary A purchases $5,000 of raw materials from Subsidiary B.
Subsidiary A receives a bill for $20,000 in accounting services, half of which relates to work performed on behalf of Subsidiary B. Subsidiary A issues an invoice to Subsidiary B for the balance due.
At the end of the period, Subsidiary A owes payment to Subsidiary B for the materials purchased. Subsidiary A expects to be reimbursed for Subsidiary B’s share of the accounting services bill. Likewise, Subsidiary B expects Subsidiary A to pay for the goods sold and simultaneously plans to reimburse Subsidiary A for the accounting services bill.
After offsetting the payables and receivables balances, Subsidiary B has a remaining balance of $5,000 due to Subsidiary A. At this point, Subsidiary B can issue payment for the balance due and the open payables and receivables balances between Subsidiary A and Subsidiary B will be zero on both sides.
Netting in NetSuite – Historical
Until Release 2020.2, NetSuite did not offer any functionality to support or manage the netting process. Users had to develop custom reports to identify mutual intercompany balances and then perform a painful, time-consuming process of creating and applying journal entries to offset open bills and invoices to leave the net balances available to pay or be paid on each side. The lack of standard reports or automation left ample room for user error.
An even less ideal outcome occurred for companies who avoided the monthly clean up and allowed open balances to accumulate. The unrealized gain/loss posting from month-end currency revaluation would grow month over month due to foreign amounts sitting open and each intercompany elimination run became more difficult to reconcile as the number of open transactions increased. At best, these companies had a reconciliation headache; at worst, this situation could result in a material inaccuracy of financial reports.
In all cases, NetSuite users were ready for a system solution to the intercompany netting challenge.
The Future of Netting in NetSuite
In 2020.2, the netting process begins when users access the Balance Overview page, a new interface designed to display intercompany receivables and payables balances in a single unified view. The information here can either be used to facilitate the manual netting process, or it becomes the entry point to the new automated settlement process.
In addition to displaying open balances, the Balance Overview page displays an amount “available” for netting. This amount is derived from payables/receivables balance for each subsidiary pairing that shares a common transactional currency. For example, if Subsidiary A has a receivables balance of $1,000 and a payables balance of €200 and Subsidiary B has a receivables balance of €200 and a payables balance of $1,000, these balances could not be offset as there are multiple transactional currencies involved.
When there is an amount is available for netting, clicking the ‘New’ hyperlink will navigate users to a new page called the ‘Netting Workbench‘ from where a new transaction type called a ‘Netting Settlement‘ replaces the manual journal entries previously required to offset open invoices, bills, vendor credits, and credit memos.
From the Netting Workbench, select the transactions to be “paid” with the Netting Settlement or click the ‘Suggest Netting’ button for NetSuite to automatically select transactions for settlement (chosen in order of oldest to newest up to the ‘Maximum Nettable Amount’). The date chosen here is important as it will determine the exchange rate used to settle transactions held in a foreign currency. If the netting exchange rate is different from the selected transactions’ exchange rates, NetSuite will calculate and post realized gain and loss and rounding gain and loss entries.
After the user clicks ‘Save’, a ‘Netting Statement‘ is generated in Pending Approval status. The Netting Statement lists the transactions that will be paid, the exchange rates used to process the settlement and the Netting Settlement transactions that will be generated upon approval. If there is a mistake, the Netting Statement may be deleted at this stage.
When the entry is approved, the individual Netting Settlement transactions generate a GL impact. Each subsidiary will have two Netting Settlements – one entry to Accounts Payable and another to Accounts Receivable. A new system-generated Clearing Account is used as an offset in each transaction. The Netting Settlements cannot be edited directly so if there is a mistake, you must either delete the Netting Statement (which will automatically delete the Netting Settlements) or you must create adjusting journal entries.
The ‘Applied To’ subtab on the Netting Settlement lists the transactions paid by the settlement. Invoices, bills and other transactions paid via the netting process will contain a link to the Netting Settlement transaction instead of a link to a vendor or customer payment on the ‘Payments’ subtab.
The new process concludes here as the Subsidiary with the balance due can now issue and record payment according to the organization’s standard process.
Limitations
As with any brand new feature, the Intercompany Netting functionality has some limitations. SuiteAnswers Article ID 94927 lists these in detail; the following is a summary of the most impactful restrictions.
Transactions must meet certain criteria to be available for netting:
- Intercompany Journal Entries
- AICJE must have only one AP and AR line for each subsidiary-subsidiary-currency pairing to ensure that the lines are nettable. In other words, if you are in the habit of recording intercompany journal entries with more than two subsidiaries in the entry, these entries may not be available in the current Netting Workbench page.
- Intercompany Invoice and Vendor Bill
- If Bill and Invoice are generated standalone (i.e. not from a paired Purchase Order and Sales Order), a new custom field ‘Paired Intercompany Transaction’ must be populated on the bill and invoice to link them to one another. If this field is not filled in on both transactions, they will not appear available in the Netting Workbench.
- Intercompany Credit Memo and Vendor Credit
- Credits generated from returns linked to intercompany sale and purchase orders will be automatically linked/available for netting if they are generated from the same paired return and for the same amount.
- As of the 2020.2 release, pairing and netting of standalone Credit Memo and Vendor Credit transactions is not supported. The new ‘Paired Intercompany Transaction’ field available to link standalone bills and invoices is not exposed on Credit Memos and Vendor credits. This fact is not explicitly noted in NetSuite documentation but RSM has verified with the NetSuite product team that this is an enhancement targeted for inclusion in a future release.
Intercompany “zero payment” is not supported. In other words, if you have a vendor bill and a vendor credit but no accounts receivable transaction, you cannot offset the bill with the credit using the intercompany netting feature.
The new Corporate Exchange Rate type introduced in release 2020.2 is not yet supported. The exchange rates used in Netting Settlements are the same daily rates used in other transactions. Exchange rates can be manually edited on the Netting Workbench page if users wish to use an alternate rate.
Key Considerations
- Users will require a minimum of “Create” level permission to the Netting Settlement transaction to generate a Netting Settlement. A separate transaction permission, Netting Settlement Approval, is required to approve a Netting Statement.
- Users will require access to both of the subsidiaries impacted by the netting entry to create and/or approve the entry.
- The field values on the Netting Statement list page are available to SuiteAnalytics Workbook and Transaction-type saved searches.
- In some countries, netting of intercompany balances is prohibited by law; all balances must be settled with cash payments. Before proceeding with intercompany netting in NetSuite, confirm the requirements in each country where your business operates.
Conclusion
The new intercompany netting feature provides immediate benefit to NetSuite OneWorld customers looking to gain efficiencies in cash management, payment processing and collections. Although the current release is not without limitations, Oracle continues to expand the Intercompany Framework, a collection of features to enhance intercompany transaction processing, and improvements to the netting feature are sure to continue in the next several releases.
Organizations looking to leverage this feature should test relevant use cases in a Sandbox account to practice linking transactions, review how exchange rate gains/losses will be calculated and confirm which user roles will require permission changes to support the new netting transaction type.
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