Intercompany agreements are agreements 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.
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.
Intercompany Agreements are a vital part of corporations containing more than one division. These agreements help the divisions keep each division's financial information separate. They also assist in keeping accurate financial statements per division by keeping all transfers of goods and services separate from other divisions.