How Does NetSuite Handle Automated COGS Elimination in Intercompany Transactions?

NetSuite's auto-elimination feature processes intercompany transactions to ensure accurate consolidated financial statements. The treatment of Cost of Goods Sold (COGS) during this process can be understood through the following examples, illustrating both arm's length and non-arm's length intercompany transfers.NetSuite's auto-elimination feature processes intercompany transactions to ensure accurate consolidated financial statements. The treatment of Cost of Goods Sold (COGS) during this process can be understood through the following examples, illustrating both arm's length and non-arm's length intercompany transfers.Arm's Length Intercompany Transactions (using Sales Orders and Purchase Orders)Consider a global company with two subsidiary entities, FROM and TO, where an Item has a cost of $16.00 and a transfer price of $20.00.

1. Scenario: Subsidiary TO receives an order from an external customer but lacks available stock. Subsidiary FROM has the item in stock.

2. Intercompany Purchase Order: Subsidiary TO creates an Intercompany Purchase Order for the Item.

3. Intercompany Sales Order and Fulfillment (Subsidiary FROM): Subsidiary FROM approves and generates the Intercompany Sales Order, fulfilling it on the same day.

Debit COGS $ 16.00Credit Inventory $ 16.00

1. Item Receipt (Subsidiary TO): Subsidiary TO receives the item.

Debit Inventory $ 20.00Credit Inventory Received not Billed $ 20.00

1. Billing (Subsidiary FROM): Subsidiary FROM bills Subsidiary TO.

Debit Intercompany AR $ 20.00Credit Interco Sales $ 20.00

1. Intercompany Vendor Bill (Subsidiary TO): Subsidiary TO receives the Intercompany Invoice and creates the Intercompany Vendor Bill.

Debit Inventory Received not Billed $ 20.00Credit Intercompany AP $ 20.00

1. Elimination Task Execution: When the Elimination Task is run, the following entries occur:

Debit Intercompany AP $ 20.00Credit Intercompany AR $ 20.00Debit Interco Sales $ 20.00

Note: In arm's length intercompany transfers, NetSuite documentation generally advises against marking COGS accounts for elimination during this task.

1. External Sale and Billing (Subsidiary TO): Subsidiary TO ships the Item to the external customer and bills them.

Debit COGS $ 20.00Credit Inventory $ 20.00

Non Arm's Length Intercompany Transactions (using Intercompany Transfer Orders)

1. Item Fulfillment (Subsidiary A):

Dr. Inventory in Transit 1,000.00 Sub ACr. Inventory Asset 150.00 Sub A

1. Item Receipt (Subsidiary B):

Dr. Inventory Asset 1,000.00 Sub BCr. Inventory in Transit 1,000.00 Sub ACr. Interco AR/AP 1,000.00 Sub BDr. Interco AR/AP 1,000.00 Sub A

1. Elimination Journal Entry (Elimination Subsidiary):

Dr. Interco Revenue 850.00 Elim SubCr. COGS 850.00 Elim Sub

In both scenarios, the automated elimination process addresses intercompany balances. The COGS adjustment observed during elimination is typically related to the profit margin recognized on the intercompany transfer, which is then eliminated to reflect the true cost to the consolidated entity.It is important to note that if an item transferred internally is not subsequently sold to an external customer within the same accounting period, the automated COGS adjustments may lead to unexpected accounting outcomes. This can result in a credit to COGS that may not align with the current inventory position.There is no direct way to alter NetSuite's standard behavior regarding this automated COGS adjustment. Organizations that require different accounting treatment for intercompany COGS, or cannot accommodate the system's automated adjustments, should carefully evaluate the use of the auto-elimination functionality and consider manual adjustments or alternative intercompany transaction setups.