Intercompany agreements are arangements made between two businesses owned by the same company. Typically, these are two divisions under the same corporation. This agreement states how intercompany sales or transfers of goods, services or time are handled.
Purpose of ICAs
Companies cannot profit from intercompany sales. Because of this, divisions of one company are required to report intercompany transactions in a certain way. The purpose of these agreements is to explain how transfers take place and the financial consequences and actions required for both parties involved. Sometimes an intercompany agreement is used for terminating an outstanding contract made between two divisions.
This agreement contains the date of transaction, the names of both parties involved and the good or service transferred. It explains that both parties operate under the same parent company.
Benefits of ICAs
Corporations with multiple divisions benefit from intercompany agreements by being able to transfer good to where they'll do the corporation the most good without incurring adverse tax consequences that might otherwise arise. In addition, by segregating goods transfers initiated by intercompany agreements from other transactions, they help the corporation and its divisions more accurately analyze and interpret sales and inventory data.