lc process mapping and solution

PROCESS MAPPING & SOLUTION DOCUMENT

Department: Finance Units: Payables – Letter of Credit

Author: Ejaz Hussain

Creation Date: June 4, 2009

Last Updated: June 6, 2009

Version 1.0

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Contents

CONTENTS..................................................................................................................................................................................................21. INTRODUCTION..................................................................................................................................................................................32. PURPOSE............................................................................................................................................................................................3TYPE OF LETTER OF CREDIT.....................................................................................................................................................................41. SIGHT LETTER OF CREDIT................................................................................................................................................................52. USANCE LETTER OF CREDIT.............................................................................................................................................................7LC TRACKING DFF ENABLED...................................................................................................................................................................8LC DETAIL.................................................................................................................................................................................................9GLOSSARY OF COMMONLY USED TERMS................................................................................................................................................13OPEN AND CLOSED ISSUES FOR THIS DELIVERABLE............................................................................................................................14

Open Issues.....................................................................................................................................................................................14Closed Issues..................................................................................................................................................................................14

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1. Introduction

This paper will provide a practical guide to letters of credit and as there is no functionality as of now to use Letter of Credit as a means of payment which is increasingly being used, as a workaround in Oracle Payables to handle payments through Letters of Credit.

2. Purpose

The requirement is in Abdullah AM AL-Khodari Sons; after they Open LC(Letter of Credit) with bank against a Supplier, they want to track it in the system.

This document will serve as a basic tool in understanding letters of credit solution within Payable module.

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Type of Letter of Credit

There are two type of Letter of Credit

1. Sight letter of credit

Sight letter of credit can permit the beneficiary to be paid immediately upon presentation of specified documents.

2. Usance letter of credit:

Term/Usance Letters of credit can permit the beneficiary to be paid at a future date as established in the sales contract.

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1. Sight Letter of Credit

1. Sight letter of credit:

Sight letter of credit can permit the beneficiary to be paid immediately upon presentation of specified documents.

Steps:

1.1 Raise a Purchase Order

Raise a Purchase Order in Oracle Purchasing stating the description of goods, quantity, unit price, and terms of delivery. Purchase order would be issued after beneficiary examined that all the terms and conditions of letter of credit are/can be complied with.

1.2 Record a Prepayment Invoice against Vendor

In case of confirmed sight letter of credit the confirming bank is obliged to honour the drawing without recourse to the beneficiary. Beneficiary (Seller) should present following documents to Advising / Confirming Bank:

• Invoice with description of goods shown exactly in LC

• Bill of lading and/or other transport documents

• Draft (Bill of exchange)

• Other documents as required by letter of credit

The advising/confirming/negotiating bank will claim reimbursement from the issuing bank and issuing bank in turn from buyer by debiting his account. On receipt of the debit advice from Bank enter a Prepayment Invoice in Oracle Payables against Vendor:

The following transactions will happen.

In cases where seller bears the risk – (Trade term is DAF/DES/DDU/ DDP)

Debit Credit In cases where title of goods are deemed to be transferred to Buyer (Trade term is EXW/ FOB/CFR/CIF)

Debit Credit

DR. Advance to Supplier XXXX Dr. Goods in Transit xxxxCR. Supplier – Liability XXXX Cr. Supplier - Liability xxxx

1.3 For Payment of the above Prepayment Invoice

LC payment – Payment methond has been created; use this paymet method to pay above invoice. It will Dr. Supplier liability, knock of Supplier account and Cr. Liability a/c – BillPayables.

Account Debit Credit

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Dr. Supplier – Liability XXXX Cr. LC Billpayables A/c XXXX

There is one Program that has been schedule to Run every end of day; it is ’Update Matured Bills Payable Status’It will Dr. Billpayables a/c and Cr. Bank a/c which you had selected while making above payment.

Account Debit Credit Dr. LC Billpayables A/c XXXX Cr. Bank A/c XXXX

1.4 Receipt of Goods On receipt of goods record a receipt transaction in Inventory

Account Debit Credit Dr. Material Account XXXX Cr. AP Accrual Account XXXX

1.5 On receipt of Invoice from Vendor Enter an Invoice in Oracle Payables & match it with receipt/Purchase order:

Account Debit Credit Dr. AP Accrual Account XXXX Cr. Liability Account XXXX

1.6 Apply the prepayment against above Invoice

Account Debit Credit Dr. Liability Account XXXX

Cr. Advance to Supplier / Goods in transit

XXXX

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2. Usance Letter of Credit

2. Usance letter of credit:

Term/Usance Letters of credit can permit the beneficiary to be paid at a future date as established in the sales contract.

2.1 Raise a Purchase Order Raise a Purchase Order in Oracle Purchasing stating the description of goods, quantity, unit price, and terms of delivery. Purchase order would be issued after beneficiary examined that all the terms and conditions of letter of credit are/can be complied with.

2.2 Receipt of Goods. On receipt of goods record a receipt transaction in Inventory

Account Debit Credit Dr. Material Account XXXX Cr. AP Accrual Account XXXX

2.3 On receipt of Invoice from Vendor Enter an Invoice in Oracle Payables & match it with receipt:

Account Debit Credit Dr. AP Accrual Account XXXX Cr. Supplier – Liability XXXX

2.4 For Payment LC payment – Payment methond has been created; use this paymet method to pay LC above invoice. It will Dr. Supplier liability, knock of Supplier account and Cr. Liability a/c – BillPayables.

Account Debit Credit Dr. Supplier – Liability XXXX Cr. LC Billpayables A/c XXXX

There is one Program that has been schedule to Run every end of day; it is ’Update Matured Bills Payable Status’It will Dr. Billpayables a/c and Cr. Bank a/c which you had selected while making above payment.

Account Debit Credit Dr. LC Billpayables A/c XXXX Cr. Bank A/c XXXX

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LC Tracking DFF enabled

The Following setups were done to achieve the above Functionality

Defined an Independent Value set for LC Tracking.

Enabled Context Sensitive DFF at “LC Tracking Value Set” values definition, this includes:

a) Supplierb) Currencyc) Issuer Bankd) Foreign Currency Amounte) Functional Currency Amountf) Date of Issueg) Date of Expiry

Defined DFF at Invoice Entry Header Level with one segment “LC Number” with the table validated value set attached. This value set is created with the validations of Supplier and Invoice Currency Code and user can select the LC Numbers available against the Supplier and the currency while entering Prepayment/Standard invoice

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LC Detail

When LC opened with bank record the LC details:

Step-1: Entered LC Details in Flexfield Segment Values Navigation> Payables> Setup> Flexfields>Descriptive>Values

Click on Values and then Type LC Tracking in name field:

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Click Here

Click (a)here

TYPE “LC TRACKING” Here

Press find button when above two task done

It will shows the values of exisitng LC numbers; Enter New LC number and its Drescription

Then Press Tab button to enter its detailsAfter pressing the Tab button the following Screen will comes

Enters LC details at here i.e.:Supplier Name:Currency:Issuer Bank:Foreign Currency Amount:Functional Currency Amount:Date of issue:Date of Expiry:

Save your work and now its ready to choose LC numbers while entering Prepayment/Standard Invoice in Invoice workbench

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Invoice WorkbenchWhile entering Prepayment/Standard Invoice go to Invoice header level DFF and after entering Project and Department code, click on Invoice Reference and select LC Detail from Drop down LIST:

Once you select LC details: The LC number fields appears

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Select LC numbers from Drop down List:It will only shows the LC numbers of supplier you had selected in Invoice Workbench

Press Ok button to go back to invoice workbench and complete your Invoice as ususal.

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Glossary of commonly used termsIssuing bank: The bank which issues the letter of credit on the instructions of the importer (usually, but not necessarily, the importer's own bank). Beneficiary: The party in whose favour the letter of credit is issued. Advising bank: The bank, usually but not necessarily in the beneficiary's country, through which advice of the letter of credit is sent by the issuing bank. Confirming bank: A bank usually in the country of the beneficiary which, at the request of the issuing bank, joins that bank in undertaking to honour drawings made by the beneficiary, provided the terms and conditions of the letter of credit have been complied with. Negotiating bank: The bank specifically nominated in the letter of credit to purchase the bill of exchange (draft) drawn by the beneficiary on a drawee other than the negotiating bank. (If a letter of credit is freely negotiable, any bank willing to do so can be the negotiating bank). EXW ‐ Ex works: "Ex Works" is the minimum/lowest obligation of a seller. The seller agrees to make the goods available to the buyer at the seller's premises (named place). The seller under EXW is not even responsible for bearing the cost of loading the goods onto the vehicle provided by the buyer, unless otherwise agreed in advance. The buyer bears the full cost and risks involved in bringing the goods from the EXW location to the ultimate destination. FOB – Free on board: Goods shipped under FOB terms are placed on board the ship by the seller at the specific port of shipment named in the sales agreement/purchase order/contract. All costs and risks from the point where the cargo "crosses the ship's rail" (i.e. is lifted from the quay/pier onto the vessel) passes to the buyer.CFR – Cost & freight: Under CFR, the title and risks change at the ship's rail, just as in FOB terms, but the cost allocation is different. For goods shipped under CFR, the seller pays all costs to deliver the goods up to the named port of destination (while under FOB, above, the buyer is responsible for those costs). CIF – Cost, insurance & freight: In its simplest form, CIF is CFR + Insurance. The seller must procure transport insurance against the risk of loss or damage to the goods (to the extent that is mutually agreed upon in the sales agreement). Seller contracts with insurance carrier or agent and pays the premium ‐ but issues insurance in a form/format that allows the buyer to later make claim directly to the insurance carrier or said carrier's agent. (Since Title/Risk has changed hands at FOB point, the seller is no longer entitled to make claim, unless specifically on behalf of the buyer, who, in fact, owns the goods.) DAF – Delivered at frontier: DAF means that the seller is obliged to move the goods to the named place at the frontier (border crossing). This is primarily a rail/truck term. The seller bears all costs/risks up to this point, but is not responsible for customs clearance, duty, or taxes DES – Delivered ex ship: Using DES requires the seller to make the goods available to the buyer "on board the ship at the place named in the sales contract". Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc… are for the Buyer. DDU – Delivered duty unpaid: DDU terms require that the seller delivers the goods to the buyer, UNCLEARED FOR IMPORT, at the point or place named in the sales agreement. The seller bears all costs and risks up to this point/place.DDP – Delivered duty paid: Just as EXW represented the seller's minimum obligation in an international transaction, DDP would represent the seller's MAXI MUM obligation. Under DDP, the seller agrees to all costs and risks, including customs clearance fees and payment of import duties, up to the named place/point.

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Open and Closed Issues for this Deliverable

Open Issues

ID Issue Resolution Responsibility Target Date

Impact Date

LC_RPT Custom reports can be designed to see the LC status

Closed Issues

ID Issue Resolution Responsibility Target Date

Impact Date

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lc process mapping and solution

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