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THE OFFICIAL PUBLICATION OF THE ORACLE APPLICATIONS USERS GROUP FALL 2012
Intercompany and Intracompany
in Oracle EBS R12: A Deep Dive
The Oracle EBS Patch Wizard
Helps Users Determine
the Impact of Patches
Las Vegas Expands its Oracle
Business Intelligence Horizons
In E-Business Suite (EBS) Release 12, Oracle
completely changed the way in which intercompany
transactions can be accounted by creating a robust,
flexible, rules-based intercompany accounting program.
This accounting program, however, is only useful
if you understand how it’s used and how it should
be configured. This article will give clarity to those
configurations, EBS Legal Entities, the purpose they
serve and answer the question: “When is a legal entity,
not a legal entity?”
A legal entity must be registered with a jurisdiction,
which can be a state or province in the United States and
Canada, or a country. Wherever the legal entity is located,
there will be certain statutory requirements within a
jurisdiction that should be supported from a business
and systems management perspective. Legal entities may
represent a single component of your company or several
components unified via a single business purpose.1
O A U G F E A T U R E16
oaug feature
Thomas J. Simkiss, Jr., JD, CPA
& Lee Briggs, BizTech
1 Oracle Financials Concepts Guide, August 2010, p. 2 – 4
This article appeared in the fall 2012 issue
of OAUG Insight magazine, the official
publication of the Oracle Applications Users Group
(OAUG), and is reprinted with permission.
In Oracle EBS 11i, legal entities were required as
part of the human resources (HR) configuration and
were required to be associated with a set of books. The
purpose they served within the applications was not
always clear. In EBS R12, a new legal entity structure has
been introduced to track intercompany transactions at a
very detailed level.
ORACLE LEGAL ENTITIES
A company’s HR information and structure is
owned by the Government Reporting Legal Entity
(GRLE), which represents the formal employer in the
human capital management system (HCM). Employees
must belong to a specific GRLE within the employer’s
EBS R12 system. A GRLE can represent a registered
company or other registered legal entity. GRLEs are a
particular type of system legal entity and serve to connect
employees with the appropriate company or other entity
in the legal world.
LEGAL ENTITY
The legal entity defined in the EBS R12 should
correspond to the “legal entity” or “company” in which
transactions are recorded or required in day-to-day
business operations. Information about a
registered company or some other entity may
be stored in the “legal entity;” information
may include the registered address and
director or officer names. The legal entity
administers transaction-level rules in
compliance with national laws.
SYSTEM LEGAL ENTITY
The system legal entity within EBS
R12 is the first party on business transactions and is the
transaction tax filer and payer. Oracle recognizes that
for many groups, particularly in environments where the
authorities allow companies to treat many legal entities
as one, companies may not need or want to segment
data or account separately for each entity that they have
incorporated. Therefore, the system legal entity does not
automatically account for itself.
Oracle facilitates correlation of subledger activity
in reporting legal structures by exploiting related system
entities for operating units, ledgers and company
representation in the chart of accounts:
● Account for legal entities separately if needed.
● Account for a group of legal entities as if they
were one.
● Account for a part of a real-world legal entity as if
it were completely standalone when appropriate. 2
INTERCOMPANY AND INTRACOMPANY
ACCOUNTING
In EBS R12, balancing segments can be assigned to
legal entities to allow for transaction entry identification
and reporting. While Oracle General Ledger (GL) can
be configured without using legal entities (balancing
segments do not have to be associated with legal entity),
if a company plans on using Receivables or Payables, a
legal entity is required. The main purpose of the legal
entity in Payables and Receivables is to serve as the
custodian of banking relationships. Using the Legal
Entity Configurator and Oracle Security Wizard, legal
entities must be assigned to a particular responsibility
in order to allow it to have access to configure bank
information and associate them with legal entities.
In EBS R12, transactions between balancing
segments can be defined as either intercompany or
intracompany (See Figure 1). Intercompany journals
involve balancing segment values that map to different
legal entities. These journals are balanced for each
legal entity by using their intercompany accounts. The
balancing application programming interface (API)
uses the intercompany accounts defined for the relevant
effective date range. Since multiple accounts may be
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Intracompany
Intercompany
Transactions between two or more balancing segments
within a single legal entity. Intracompany accounts are
defined for each balancing segment value.
Transactions between two or more legal entities.
Accounts are defined at the legal entity level.
2 IBID. pg. 2 – 7
Figure 1
defined for the same date range, the balancing API
picks the accounts flagged with the Use for Balancing
indicator. The offsetting debit to a legal entity goes into
its intercompany receivables account. The offsetting
credit goes into the legal entity’s intercompany payables
account.
INTERCOMPANY ACCOUNTS
Intercompany accounts may be defined at the
legal entity level. That is, each transacting legal entity
may have different intercompany accounts defined for
different trading partner legal entities, regardless of
which specific balancing segment values of those legal
entities are used in the journals. The transacting and
trading partner balancing segment values can also be set
to “All Other,” and not individually specified for each
combination.
There are different types of intercompany journals.
The balancing API first determines the type of the
intercompany journal (one-to-one, one-to-many, many-
to-one, or many-to-many) with respect to the legal
entities. For intercompany balancing, there is no clearing
company usage and all legal entities are balanced by
summary net with respect to each other. 3
INTRACOMPANY BALANCING
Intracompany balancing rules are used to create
balancing lines on journals between balancing segment
values either within the same legal entity or where there
is no legal entity context. Intracompany balancing rules
are used when more than one balancing segment value
exists on a transaction or journal entry, as long as you
have selected the “Balance Intracompany Journals” option
for the ledger. You cannot post a journal in the general
ledger when the debit and credit amounts for each
balancing segment value do not net to zero.
You must define intracompany balancing rules if
you want to balance journals automatically. The default
balancing rule should be defined for the journal source
“Other” and journal category “Other” for the ledger and
legal entity you want to balance. The default accounting
rule on each balancing rule is defined for the debit
balancing segment value “All Other” and credit balancing
segment value “All Other.”
With intracompany accounting, you can define
both a debit (due-from) and credit (due-to) balancing
segment, which gives you more control over each
balancing relationship. You can specify different debit
and credit accounts for each different intracompany
trading partner, which is represented by a specific
balancing segment value.
“All Other” is also available as a balancing segment
value if you want the balancing segment value to use the
same due-to/due-from accounts for every intracompany
trading relationship that has not been specifically defined.
If you set up a specific debit and credit balancing
segment value, then the assigned debit and credit
account combinations are used. If you use “All Other,”
the appropriate trading partner balancing segment
value replaces the balancing segment value of the
account combination. You can also determine the level
the balancing API should use when selecting either
“Summary Net” or “Detail.”
For balancing many-to-many journal entries, there
are several balancing segment values with net debits
and net credits on a transaction, and it is not possible to
determine which balancing segment value is trading with
which balancing segment value. You can decide whether
to use a clearing balancing segment value or a default rule
to handle such transactions.4
NOTE: If you use cash management and the
automated sweep feature, R12 uses the intracompany
account as a CLEARING account to sweep across
legal entities. So even if you are not using intracompany
accounting, this setup may be required.
REALTY CO
Realty Co manages approximately 1,200 entities
in the United States, Canada and Mexico. Each
separate property is a distinct legal entity with its own
required reports (both internal and external) tax filing
requirements, and local and regional reporting and
analysis. Realty Co implemented Oracle EBS Financials
Release 12.1.3 to manage the back office functions for all
the entities. Modules utilized include General Ledger,
Payables, Assets, Receivables, Cash Management and
E-Business Tax. The chart of accounts was configured
with six segments: Company (Balancing Segment), Cost
O A U G F E A T U R E18
3 Oracle Financials Implementation Guide, August 2010, pg. 5 – 2, 3 4 IBID, pg. 5 – 5
Center, Natural Account, Intercompany and two future
use segments.
The main business issue to be addressed was how to
account for all of the different intercompany transactions.
The requirement was to allow each of 1,200 entities to
transact with one another as required. However, Realty
Co wanted to use clearing companies as the intermediary
channel for running most of the transactions, thus not
having to track potentially thousands of intercompany
balances and transactions.
THE BUSINESS REQUIREMENT
For the approximately 1,200 entities managed by
Realty Co, Payables and Receivables invoices can be
charged to any single or multiple entities. In addition,
Assets can be assigned to any legal entity, and journal
entries can be made between any legal entities.
Realty Co has 17 disbursement bank accounts.
Each entity is assigned one (and only one) disbursement
bank account. In addition, Realty Co has seven clearing
companies, each associated with a disbursement bank
account. Any entity associated with Bank Account 1
will be associated with Clearing Company A; any entity
associated with Bank Account 2 will be associated with
Clearing Company B.
Any journal entry between two (or more) entities
with the same clearing company must use the clearing
company to ensure the journal is balanced. There is no
possibility of any journal entry between two entities with
different clearing companies.
THE SOLUTION
Oracle’s EBS R12 documentation defines the legal
entity as “legal entity” or “company” in which transactions
are recorded or required in day-to-day business
operations. A legal entity is a discrete legal personality
characterized by the legal environment in which it
operates. As stated previously, legal entities have the right
to own property, the right to trade and the responsibility
to comply with appropriate laws.
Under this generally accepted definition, each of
Realty Co’s 1,200 entities would be defined as a “legal
entity” since, for example, AP invoices would need to
be recorded and each of the 1,200 legal entities would
have one (and only one) balancing segment value
assigned to it.
Using the definitions outlined above, a single
intracompany account would need to be defined. It is
unlikely it would be used, since there would only be one
balancing segment value in each legal entity, however, it
would still need to be defined.
In addition, in order to meet Realty Co’s
intercompany requirements, more than 1.4 million
intercompany account combinations would need to be
defined. While technically correct, this approach was
deemed unacceptable, both from a go-live build out, as
well as from an ongoing maintenance perspective.
Reconsidering the definition “transactions are
recorded or required in day-to-day business operations,”
Realty Co sought an alternative approach: rather than
considering the AP invoice (or AR invoice) as the
transaction which is recorded or required in day-to-day
business, what if the AP
payment (or AR receipt)
was the transaction?
Rather than having
1,200 legal entities, each
associated with one (and
only one) balancing
segment value, Realty
Co could define 17 legal
entities, each associated
with multiple balancing
segment values.
Rather than
defining 1,200 intracompany accounts in scenario one,
we would only need to define 17 intracompany accounts
(See Figure 2).
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oaug insight ● fall 2012
Figure 2
Intracompany
Legal Entity 1 Legal Entity 2
Company 2015 transacts with Company 2020.
BS 2015 intracompany receivable BS 2000.
BS 2020 intracompany payable BS 2000.
Balancing 2000Segment
Balancing 2015Segment
Balancing 2020Segment
3500
3515
3520
The legal entity configurations for Realty Co show
multiple legal entities defined. However, only two of
these legal entities have balancing segments assigned
to it. This legal entity, “Management LLP” (shown in
Figure 3) owns one bank account (not shown), and has
multiple balancing segment values assigned to it. Payables
invoices charged to any of these balancing segment values
will only be paid by this bank account.
INTRACOMPANY BALANCING RULES
LEGAL ENTITY MANAGEMENT Once a legal entity has a balancing segment value
(or multiple balancing segment values) assigned to it, at
least one intracompany balancing rule must be defined.
Separate intracompany balancing rules can be configured
based on Journal Source and Journal Category, so if you
need one Intracompany account to be used for journals
created from a source of Payables, and a different
account used by journals from Receivables, intracompany
accounting gives you that flexibility. Realty Co used the
same account for all intracompany journals, so was able to
use a source and category of “Other.”
SOURCE AND CATEGORY
BALANCING DETAILS
Once you have defined the journal source and
category to which this intracompany balancing rule
applies, you need to specify the debit and credit accounts
(intracompany receivables, intracompany payables)
account. Within this form, you have the ability to specify
intracompany receivables and payables accounts for each
combination of balancing segment values. You can also
specify intracompany receivables and payables accounts
for all combinations of balancing segment values within
the legal entity by using the “All Other” balancing
segment values. (See Figure 4).
SOURCE AND CATEGORY OPTIONS
You also need to specify some options for how the
intracompany journal entries should be booked, and
these can vary by legal entity. You can specify whether
intracompany journal entries are generated at a journal
line level or whether the intracompany journal entries
should be summarized for the entire journal. You have
O A U G F E A T U R E 20
Figure 3
21 oaug.org
the option to specify whether you should use a clearing
company for all journals or just for journals which have
“many-to-many” intracompany journal lines. To meet
Realty Co’s requirements, any intracompany journal entry
was required to go through a clearing balancing segment.
MARY ROAD INVESTMENTS
Mary Road, a trading firm that operates around the
clock and around the globe, selected Oracle EBS 12.1.3
to assist them in transitioning from a manual Excel-
based, process-driven month-end close and reporting
cycle to an integrated, rapid and agile process.
THE BUSINESS REQUIREMENT
Mary Road has 16 legal entities throughout
the world, and each legal entity has one (and only
one) balancing segment value assigned to it. Mary
Road needed to be able to transact between any
legal entities and even across ledgers. A journal
entry or invoice could be made between any
combinations of legal entities. Rather than use an
intercompany segment in the chart of accounts,
Mary Road wanted to define distinct intercompany
receivable and payable natural accounts for each
legal entity. In addition, Mary Road required that,
for transactions which occurred between legal
oaug insight ● fall 2012
Figure 4
22 O A U G F E A T U R E
entities in Europe or Asia, intercompany invoices to
support the transactions had to be generated.
THE SOLUTION
Mary Road required configuration of Oracle EBS
R12.1.3 Intercompany Accounting and Intracompany
accounting (defined for each legal entity but not
documented below as they are similar to what was
done for Realty Co).
Mary Road has 16 legal entities, and each legal
entity has one (and only one) balancing segment value
assigned to it.
Within the intercompany account definition
for legal entity 110, all other balancing segment
values are listed, together with an “All Other,” and
the intercompany accounting for each is defined.
In this example, the relationship between balancing
segment values 110 and 105 was selected and used to
define the intercompany
receivables and payables
account for this
combination (See Figure
5). These accounts have
effective dates, so you are
able to end-date a specific
intercompany receivables
account as of 31-Dec-
2012 and start using a new
intercompany receivables
account on 1-Jan-2013.
It is important to note that when creating an
intercompany relationship, Oracle EBS R12.1.3 does not
generate a reciprocal relationship. For example, when the
relationship in legal entity 110 between companies 110
and 105 was created, Oracle did not create the reciprocal
relationship in legal entity 105 and 110. This will still
need to be defined.
CONCLUSION
Oracle has developed a robust and flexible solution
for handling transactions between legal entities in EBS
Release 12. Use of the legal entity configurator along
with intercompany and intracompany accounting to
automatically balance transactions between multiple legal
entities can save time and money by streamlining the
close process and simplifying month-end intercompany
reconciliations.
While legal entities now play an important role in
EBS R12, it is important to determine if you require
to set all of the legal entities that may exist in your
organization up in Oracle. At the beginning of this article
we asked, When is a Legal Entity not a legal entity? As it
relates to EBS R12 and intercompany and intracompany
configuration, the answer is when that legal entity is
only used to record transactions and hold balances but
is not required to maintain or conduct banking related
transactions. Knowing this distinction and understanding
when and how to use EBS Legal Entities can have a
dramatic impact on your implementation and ongoing
use of EBS.
Thomas Simkiss is the Chief Operating Officer and
Lead Financials Architect at BizTech. Thomas has 15 years
of Oracle Applications experience both as an end-user and
implementer across many industries, including Telecom,
Retail, Membership Organizations, Healthcare, Government,
and Social Services. He is a member of the New Jersey State
Society of Certified Public Accountants, and a member of
the Pennsylvania and New Jersey Bar Association. Contact
Thomas at [email protected] or follow @ThomasSimkiss.
Lee Briggs is the Financials Practice Director for
BizTech. Lee has worked with Oracle for over 13 years in
Financials, Supply Chain and Project Accounting. Lee is the
Chairman of the ADI SIG and presents regularly at local
and national Oracle User Group conferences. Contact Lee at
[email protected] or follow @LeeBriggs. Figure 5
Intercompany
Legal Entity 1 Legal Entity 2
Company BS 105 transacts with Company BS 110.
Intercompany receivable from BS 105.
Intercompany payable to BS 110.
Balancing 110
Segment
Balancing 105
Segment
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