This is my first article on Statement of Policy (SOP), so you might wonder why I’m starting with this SOP when there are a lot of other important SOPs.

Well, I choose this for two main reasons:

• during my stint in a public listed company in Singapore, I was pulled into the Audit committee and was asked to resolve very substantial un-reconciled inter-company balances differences (well at that time, I just joined!)

• this SOP practically applies to any company that has either a few local or overseas subsidiaries, whether it’s a trading, engineering or manufacturing concern.

Do you know how serious it is when all the un-reconciled items in the inter-companies accounts are not resolved?

Your dearest external auditors might not have the comfort to express the true and fair view of the financial statements and the company’s internal control. Expenses might not have being accrued by the receiving company hence these “omitted” expenses are not properly matched with revenue and will therefore enhance the risk to the reporting of the financial statements.
The SOP or guideline if you wish to put up should have a clear policy and procedure to delineate the following key areas:

• inter-Company agreement,
• settlement ,
• handling disputes,
• reconciling and
• inter-company cross border loans & financing,

For our clearer understanding, I have appended below a sample of the guidelines, to assist those who might want to include this as one of your SOPs in your working place.

Sample Of A Current Account / Inter-Companies Policy & Procedure

1. PURPOSE
The purpose of this policy is to delineate guidelines on procedures for Inter-Company agreement, settlement , handling disputes, reconciling and inter-company cross border loans & financing.

2. SCOPE
   

This policy applies to all the entities within the Asia Pacific Region with effect from the date as stated on the cover page of this policy

3. RESPONSIBILITY
   
1. Both the General Manager & Chief Financial Executive is responsible for maintenance of this policy.
2. The Internal Audit Department or other personnel as assigned by the Vice President of Executive Management Team (EMT) is responsible to conduct periodic check and verification to ensure implementation and compliance of this policy.

4. APPLICABLE DOCUMENT
   

a. Confirmation of inter-co balances

5. INTER-COMPANY
   
1. AGREEMENT OF BALANCE

i. Inter-company Statements must be reconciled monthly and confirmed in writing at each quarter end. Nil balances do not require confirmation.
ii. Balances should be agreed in the currency of the transaction which is normally that of the selling unit, however, this may vary depending on the conditions of the trading agreement.
iii.The Chief Financial Executive of the selling unit is responsible for ensuring that the buying unit is informed of the balance to be agreed.
iv. It will be joint responsibility of both reporting units to agree the balance outstanding.
v. The following principles must be applied to eliminate differences:
i) cash in transit – must be adjusted by the receiving unit;
ii) foreign currency balances – must be agreed in the currency of the transaction and shown in the reporting currency converted at the rates issued by Corporate Centre;
iii) any items of dispute must be accepted in the books of the buying unit for the purpose of reporting inter-company balances until resolved. The procedure for resolving disputes is noted below.
In addition for Funding Loan Accounts :
iv) unrealized profit and loss due to currency conversion on Funding Loan Accounts should be transferred to reserves and shown as differences arising on currency revaluations;
v) the annual transfer of dividend ( if any ) and divisional profit to Corporate Centre must be included in the Funding Loan Account.

1. SETTLEMENT OF ACCOUNTS.
   

i. Payment is due as follows:
i) Trading and expense items : Third working day of second period following month of invoices e.g October invoices payable third working day of December period
ii) Payment must agree with the selling unit’s statement.
Payment made be made by cheque or telegraphic transfer .Contra settlement arrangements may be made if mutually agreed.
5.2 DISPUTES
5.2.1 Disputes are to be promptly notified to the selling unit by an appropriate reject note system.
5.2.2 If the reject note is not accepted, the selling unit must give written reasons for non-acceptance.
5.2.3. If invoices are not cleared for payment by the due date then the matter must be submitted for arbitration by the selling unit to the appropriate Group Chief Executives.
5.2.4 Any disputes so referred must be notified to the appropriate Regional Finance Director by the Chief Financial Executive of both the buying and selling units.

5.3 RECONCILIATIONS
5.3.1 Monthly reconciliation must be done for inter-co balances. Any reconciliation must be retained & signed off by the Financial Accountant.

5.4 INTER-COMPANY CROSS BORDER LOANS & FINANCING
5.4.1 To minimize professional fees, currency exposure and other financial/legal risks and to optimize the tax position, the Corporate Treasurer should be consulted on proposals for currency cross border loan ( from one country to another ) . The Corporate Treasurer’s authorization is required prior to implementation.
Note : This applies to loans, etc between an operating unit and its foreign subsidiaries as well as loans with Corporate Centre.
5.4.2 All proposed cross border inter-company /divisional loans must be referred to the Regional Finance Director for authorization. If in agreement, The Regional Finance Director will refer the proposal to the Group Treasurer for approval.
5.4.3 The proposal, approved by the unit’s General Manager and Chief Financial Executive, should be provided at least one month in advance, and include the following details:
i) the currency and amount;
ii) the units involved ( disclosing any minority interest);
iii) the period of the loan and rates of interest;
iv) all other terms and conditions of the loan;
Note : It is usual to use market interest rates to avoid tax consequences, and therefore local market rates should be specified.
v) the reasons for the loan, together with cash flow, balance sheet, profit and loss and ratio information, relating to the borrowing unit, covering the prior, current and next year.
vi) the proposed source of funds and two years forecast requirements. Where the source is an operating unit, the forecast should also include this unit’s cash flow, balance sheet and profit and loss account covering the prior, current and following year.
vi) alternatives, including –share capital injection, availability, cost and term of local borrowing.
vii) An assessment of the foreign exchange exposure, and how it is to be managed. Foreign exchange exposure which is left uncovered will require the specific approval of the Group Treasurer.
viii) An evaluation of the tax and accounting implications in both countries, incljuding all withholding tax aspects.
ix) The local legal and exchange control position in both the countries that are paying and receiving the loan, including any filing requirements with regulatory authorities. Note : copies of any external advice from lawyers, audit,etc should be attached to or included with the proposal.
5.4.4 The Chief Financial Executive is responsible for ensuring that all the requirements in the proposal are fulfilled before the loan transfer is effected.

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