When Value Moves: Intercompany Transfers, Transparency and Creditor Risk

Deloitte LLP (“we”, or “us”) was retained, through counsel, to provide forensic accounting observations on entity level financial statement disclosures in the context of litigation involving a project specific real estate development entity. In reviewing the disclosures, one issue became clear: intercompany transactions can raise important lender concerns where liquidity or value moves across legal entities while secured debt remains outstanding. Although such transactions may reflect ordinary business realities, including project funding, shared services and centralized treasury functions, they may also impact how creditors assess a borrower’s financial position, available collateral and ability to meet its obligations. 

Questions involving intercompany balances and the movement of value across related parties often cannot be understood through a forensic lens alone. Rather, they can sit at the intersection of forensic accounting, financial reporting and insolvency. These observations do not constitute legal conclusions, but reflect practical considerations commonly encountered by forensic practitioners in insolvency adjacent matters. This article uses the three lenses to outline a practical framework for assessing creditor risk when value moves across related parties.  

The Engagement Context: A Forensic Mandate That Raised Broader Questions 

Our forensic accounting team was engaged, through counsel, on behalf of a property and casualty insurer in connection with litigation brought by a project-specific real estate development entity (the “Project Entity”). The dispute arose from a fire during the construction of a large multi-unit residential development, where the Project Entity alleged property damage and delay related losses. The matter also unfolded alongside broader insolvency proceedings, with multiple affiliated property-owning entities brought into a court supervised restructuring. 

Public reporting and court materials framed a recurring concern: the Project Entity group’s financial position was under pressure, and secured lenders questioned whether revenues and expenses were being intermingled across business lines and projects. In that context, counsel separately asked our team to prepare a privileged memorandum setting out our comments and observations on entity level financial statements disclosed in affidavit evidence of the Project Entity. Our observations were limited to the financial statements and related disclosures available on record. We did not have access to detailed ledgers, transaction level support, general ledger data, journal entries or management. Even within those constraints, the disclosed financial statements and notes revealed significant related party receivables and payables among affiliates involved in shared construction and funding functions. The engagement did not lead to a conclusion that the transfers were improper. Rather, it showed that the issues raised required analysis beyond a purely forensic lens. 

Accounting Lens: What Consolidation Hides 

The accounting lens helps explain why intercompany activity may appear muted in financial reporting, and why that may not resolve creditor concerns at the legal entity level. 

Intercompany transfers are movements of cash, assets, services or other value among entities under common control. When preparing consolidated financial statements under IFRS 10 – Consolidated Financial Statements, intragroup assets, liabilities, income, expenses and cash flows are eliminated in full on consolidation to present the group as a single economic entity.^1,2 This is a reporting outcome. It does not merge legal entities, extinguish entity specific obligations or convert lender security packages into group wide claims. 

This distinction is especially important in cases involving intercompany transfers. A balance that disappears on consolidation may still be highly relevant to a creditor if it reflects: 

• A material shift of liquidity out of the borrower entity. 
• A dependency on affiliate funding. 
• An unsecured or undocumented claim whose realization is uncertain. 

Put differently, consolidated reporting may simplify the financial story of the group while obscuring the creditor’s question: what occurred within the specific entity against which rights were granted? 

Insolvency Lens: Why Entity Separateness Matters Under Stress 

The insolvency lens highlights why intercompany activity becomes more significant when a group is under financial stress and why legal entity separateness matters in a restructuring context. 

In distressed situations, practitioners, lenders and the court often focus on whether value can be reliably traced at the legal entity level. That shift matters because insolvency processes often involve multiple affiliated borrowers, different secured lenders and distinct collateral pools. In such circumstances, assumptions that liquidity is freely available across a group may be contested, particularly where legal rights are borrower specific and intercompany arrangements are informal or poorly documented. 

The insolvency perspective also reinforces the importance of professional skepticism. Practitioners should be cautious about accepting intercompany balances at face value where:  

• Accounting records reflect large volumes of intercompany activity, but the underlying support is limited. 
• Entries are posted centrally. 
• Settlements do not resemble arm’s length conduct. 
• The rationale for transfers is not clearly documented.  

Records may reflect accounting outcomes without clearly showing the movement of value, the existence of enforceable obligations or whether legal separateness was respected in practice. 

This issue becomes more acute where an affiliated enterprise functioned operationally as a common business while remaining legally divided into separate entities. In those circumstances, it may be difficult to understand which entity funded a particular cost, which entity benefited from a payment or whether a purported receivable is in substance recoverable. Once those boundaries are blurred, subsequent reconstruction can become highly complex, and in some cases, the records themselves may become a contested issue. 

In formal insolvency situations, a Receiver, Monitor or Trustee³ will also be afforded powers to compel records, investigate transactions, examine conduct and assess the reliability of financial information for the benefit of creditors. Such powers can be critical where ordinary financial statement disclosures and documents do not provide sufficient visibility into how value moved across the enterprise.  

For forensic accountants and fraud examiners advising creditors, the insolvency lens does not replace forensic or accounting analysis. It reinforces the need to test the reliability of the available information and recognize when formal investigative mechanisms may be necessary.  

The broader lesson is that intercompany transactions become more important in formal insolvency matters not simply because the balances are large, but because unclear documentation, discretionary funding and blurred entity boundaries become critical when recoveries, priority and collateral rights are in question. 

Forensic Lens: What Can Be Traced 

From a forensic perspective, the central issue is not whether intercompany activity exists. In many groups, it inevitably does. The practical question is whether the movement of value across related parties can be reconstructed, explained and assessed at the legal entity level.  

For practitioners advising creditors, the central question is whether the borrower itself is retaining enough liquidity and value to meet its own obligations, or whether that value is being moved to other entities within the corporate group. 

From a creditor’s perspective, the movements become significant when they affect the borrower’s cash position, repayment capacity, covenant compliance or collateral base. A lender-focused forensic review should ask targeted questions and seek documents that clarify how value moves across borrowers and whether that movement is transparent and supportable.  

The questions and document requests below are illustrative, not exhaustive, and should be tailored to the facts and creditor issues in the underlying matter. 

Questions to ask:  

• What intercompany agreements exist, and what are the terms, priority, repayment triggers and subordination features?  
• What does the relevant credit documentation permit or restrict in respect of intercompany transfers (e.g., restricted payments, permitted distributions, intercompany loans and investments) and were required conditions met?  
• Who authorizes intercompany transfers and what oversight exists?  
• How does management identify, document and monitor related party relationships and transactions?  
• What is the business or commercial rationale for the related party arrangements? How do they align with each entity’s operations and financing structure?  

Documentation to request:  

• Accounting and Transaction Records 
  • Intercompany ledgers, aging schedules, settlement history, supporting invoices, journal entry support and approvals.
  • Fair market value or pricing support for intercompany charges, including comparable third-party pricing where available.  
• Funding, Legal and Creditor Protection Documents 
  • Cash management policies and any intercompany loan or funding agreements, including repayment terms and any priority or subordination features.  
  • Guarantees, letter of support, cross default provisions and cash management agreements.  
  • Contractual set off or netting rights, and any internal netting practices.  
• Governance and Organizational Documents 
  • Legal entity organization chart, list of key management and board members and treasury delegation of authority and board approvals where relevant.  

Even without full records, financial statements and notes may still provide meaningful signals. In our forensic accounting engagement, two features stood out from an entity level liquidity and documentation perspective: 

1. Liquidity did not always track operating performance. The entity level disclosures reflected periods where the Project Entity’s operating position was thin, yet funds were still advanced to, or settled with, affiliated entities. From a creditor risk perspective, the issue is not impropriety, but whether the borrower is retaining liquidity consistent with its own obligations. 
2. Terms were discretionary and lightly documented. The financial statement notes described related party balances as unsecured, non-interest bearing, without specific repayment terms, with advances and repayments made as required, and repayment characterized as discretionary. While not inherently concerning, the lack of documented repayment triggers, priority and subordination makes it harder to assess the direction of value movement and how liquidity is managed across legally distinct borrowers. 

Even where practitioners are limited to financial statements, notes and affidavits, the disclosed mix of related party balances, their stated terms and creditor concerns can still identify where value may be moving and where follow up is required. Limited disclosure may not answer the full question, but it can identify the right question. 

Assessing Risk with Confidence

Although we were retained as forensic accountants to provide observations on entity level financial statement disclosures, the issues that emerged were equally shaped by financial reporting principles and insolvency concepts. The forensic, accounting and insolvency lenses each contribute to understanding how value moves across related parties and what that movement may mean for creditors. 

Taken together, these perspectives provide a practical framework for assessing creditor risk. In practice, that means staying anchored to the legal entity — not the consolidated group. It means tracing who funded whom, assessing the terms and settlement history of balances, testing liquidity against operating performance and evaluating who authorized transfers and why. 

Intercompany activity is not inherently problematic. Where value moves across borrower boundaries, its significance is best assessed by considering what consolidated reporting may conceal, why legal separateness matters when financial stress emerges and what value can ultimately be traced and supported at the legal entity level.

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^{1 IFRS 10, Paragraph 86(c)
2 IFRS 10, Appendix A
3 Pursuant to the Bankruptcy and Insolvency Act}