Every Subsidiary Reports a Profit. So How Much Does the Group Make?

A parent company in Korea makes a batch of components at a cost of USD 100,000 and sells them to its Vietnam subsidiary for USD 130,000. On the parent’s books, the batch earns USD 30,000. By the end of the quarter, the Vietnam plant has used only half of the components to make and sell finished goods. The other half is still in its warehouse.

The parent reports a profit. The subsidiary reports a profit. But the USD 15,000 earned on the components still sitting in Vietnam has not come from any customer. For the group, it is money moving from one pocket to another. This is the everyday problem with intercompany transactions, and the reason each company’s profit cannot answer a simple question: how much does this product really make?

Why don’t subsidiary profits add up to group profit?

When companies in the same group trade with each other, each records revenue, cost and profit as if it were selling to an outside customer. That is correct for each country’s statutory reports. But from the group’s point of view, profit only exists when goods reach the end customer.

There are two common reasons:

• Profit on goods still in a sister company’s warehouse. Until the goods are sold outside the group, the intercompany profit is not group profit.
• Intercompany prices are set for tax, not for performance. Transfer prices are usually set to meet transfer pricing rules in Korea and Vietnam. So one company can look very profitable and another can look like it barely breaks even, while their real contribution is quite different.

Consolidation already handles this. So where is the problem?

Consolidated reports must still remove intercompany profit under accounting standards. The problem is that they arrive late and only show the total.

In many groups, this work lives in Excel. The finance team collects data from each company, matches every intercompany transaction, converts won and dong, then removes unrealized profit. Each period takes days, is easy to get wrong and depends on a few people. Add another subsidiary, or companies that close their books at different times, and the matching work grows.

The chief accountant of the Vietnam subsidiary often feels the most pressure: head office wants numbers faster, and the two sets of figures do not match.

When does it become a real problem?

• When pricing, or keeping or dropping a product line, is decided on company profit instead of profit across the whole chain.
• When judging the Vietnam plant: transfer prices can make a well-run plant look inefficient.
• When the group adds subsidiaries or acquires a company, and intercompany transactions grow quickly.
• When auditors, an IPO or head office ask for monthly rather than yearly figures.

How does ERP handle intercompany transactions?

The right ERP system can record each intercompany transaction from two views at the moment it happens:

• Company view: revenue, cost and profit under each country’s laws and tax rules.
• Group view: intercompany profit removed, showing the real cost and gross margin of each product from production to sale.

Both views use the same data, so most of the manual matching at period end is no longer needed. The system also handles multiple currencies and different accounting periods.

To make this work, the companies in the group need one system, or at least shared product codes, chart of accounts and intercompany rules. It is the same question many groups face when they choose a two-tier ERP model.

How TDI APJ helps

TDI APJ is an SAP partner and part of the TDI Group (Japan), with 300+ SAP projects delivered in 15+ countries. We have worked with many groups whose parent companies are in Korea, Japan and Europe. We implement SAP Cloud ERP through RISE with SAP and SAP GROW, set up intercompany processes and reporting for both the company and group views, and work directly with head office on shared rules.

Still matching intercompany transactions by hand? Contact TDI APJ to review your current flows and see what can be automated.