understanding intercompany, christine dreyer, oracle ... · pdf fileunderstanding...

Understanding Intercompany, Christine Dreyer, Oracle Consulting Germany, October 2008

Slide 1

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Was ist eigentlich Intercompany?Vortrag für die DOAG SIG, September 2009

Christine Dreyer

Oracle Consulting Germany


Slide 3

“Large corporations have been able to shift profits around between complex networks of subsidiaries in

different countries, choosing where to incur costs, where to allocate overheads or locate assets, where to

borrow money and where to make taxable profit.

http://www.guardian.co.uk/business/2007/nov/06/12http://www.guardian.co.uk/business/2007/nov/06/12””

““Over Over 60%60% of international of international

trade now takes place trade now takes place

between subsidiaries within between subsidiaries within

transnational groups, transnational groups,

according to the OECD. according to the OECD.


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Introduction to IntercompanyAgenda

• Overview

• Intercompany Business Cases Summary

• Highlighted Business Cases in Detail

• Overview of Setup Steps

• Questions?


Slide 5

Overview of Intercompany


Slide 6

“A Guardian investigation of the financial accounts of the

three big banana companies has revealed that Dole, Chiquita

and Fresh Del Monte … in some years … have paid an

effective tax rate as low as 8%, yet the standard rate of

corporation tax in the US where they have their headquarters

and file their accounts is 35%.””

http://www.guardian.co.uk/business/2007/nov/06/12

http://www.guardian.co.uk/business/2007/nov/06/12


Slide 7

What is Intercompany?What is Intracompany?

01.1220... 02.1420...

• Intracompany: within the same Legal Entity (R12)

• (R11i) Between Balancing Segments in the same Ledger;

� could be within or across Legal Entities depending on the implementation

• Before R12 this was also called Intercompany

• Intercompany:

between related Legal Entities

• Before R12 this was also between Operating

Units


Slide 8

Why is it important?

• Creates extra clearing accounting entries within the same ledger

• Balances on each balancing segment

• Option to balance on Intercompany segment (Qualifier in Accounting FlexField)

• Charging between related companies

• Intercompany revenue and intercompany expenses must not increase business volume of the group

� Balances must be eliminated or adjusted

• Transactions of both companies need to match in amount and in period for proper group accounting

• All transactions must use the same currency conversion rate for balancing in corporate currency

Intercompany Revenue

Intercompany Expense

01.1220... 02.1420...

IntracompanyClearing

�Well the real difference is that Intracompany processing is determined by

company management, whereas Intercompany has to follow the law


Slide 9

Market Drivers

• Intercompany is the top barrier to a fast close

• Intercompany must (legally) be balanced before close and consolidation

• Intercompany needs to be eliminated during consolidation

• No currency gains

• Correct Tax treatment

• Both sides of the transaction posted in same period

• Appropriate transfer pricing applied

• Intercompany may need to be documented


Slide 10

Business Cases for Intercompany and Intracompany


Slide 11

Business Cases

Financial Financial TransactionsTransactions

PhysicalPhysical movementmovement of of GoodsGoods

Financial Financial transactionstransactionsrelatedrelated to to physicalphysical movementmovement of of goodsgoods

ProcureProcure--toto--PayPay OrderOrder--toto--CashCash

Can be of a different structure,

with severalintermediate steps

Can be of a different structure,

with severalintermediate steps


Slide 12

Business CasesKey Implementation Points

• The implementation should be top to bottom approach. You need to clearly understand the corporation’s organizational setup and map it to Oracle’s Multi-Org model

• Understand the corporation´s business entities and the relationshipbetween them. Identify selling-shipping relationships and procuring-receiving relationships.

• Understand Oracle multi org structure and the building blocks in datastructure.

• Breakup the business relationships into manageable process flow and map it to various entities in Oracle applications.

• Consider how your design will stand up to changes over time.

• Challenge them with extensive unit and integrated test plans which simulate (1) the current environment and (2) scenarios going forward at least 5 years.

• Integration testing, in particular, is a great opportunity for validating how well yourbusiness processes and system transactions will flow throughout yourapplications worldwide.

• From Oracle Intercompany Whitepaper


Slide 13

Business CasesFinancial transactions only

• Cost Allocation: Costs to be shared across BU or Legal Entities• Example: central IT costs recharged to subsidiaries or BUs

• Invoice Split: Invoice to be split across BU or Legal Entities• Example: electricity invoice expense split between BU A, BU B

and BU C, each BU having a separate Balancing Segment Value

• Example: Law fees shared by all companies in the same country




ProcureProcure--toto--PayPay OrderOrder--toto--CashCash


Slide 14

Business Cases, Logisticsfrom the Intercompany Whitepaper – 1 -

INTERCOMPANY TRANSACTIONS.................................................................................................................................... 4

Flow 1: External drop shipment from supplier to customer.................................................................................................... 7

Return in Flow 1: External drop shipment from supplier to customer.................................................................................. 9

Flow 1A: External drop shipment from supplier to customer with intermediate financial nodes...................................11

Return in Flow 1A: External drop shipment from supplier to customer with intermediate financial nodes.................13

Flow 1B: External Drop shipment from supplier with shipment and procurement financial flow ................................14

Flow 1B: Return: External Drop shipment from supplier with shipment and procurement financial flow..................17

Flow 2: Internal drop shipment from supplier (Global Procurement) ................................................................................. 18

Return in Flow 2: Internal drop shipment from supplier (Global Procurement) ............................................................... 21

Flow 2A: Internal drop shipment from supplier with intermediate financial nodes (Global Procurement with

intermediate financial nodes).......................................................................................................................................................23

Return in Flow 2A: Internal drop shipment from supplier with intermediate financial nodes (Global Procurement

with intermediate financial nodes)..............................................................................................................................................25

Flow 2B: Internal drop shipment from supplier with intermediate financial nodes, using PO pricing option ............. 27

Flow 3: Internal drop shipment from supplier (Global Procurement) and Internal drop shipment to customer ........29

Return in Flow 3: Internal drop shipment from supplier (Global Procurement) and Internal drop shipment to

customer .........................................................................................................................................................................................31


Slide 15

Business Casesfrom the Intercompany Whitepaper – 2 -

Flow 3A: Internal drop shipment to customer (Expense Item in Customer facing organization) ..................................33

Return Flow 3A: Internal drop shipment to customer (Expense Item in Customer facing organization).....................34

Flow 4: Global Procurement of Asset item in Expense destination with Accrue on Receipt.......................................... 35

Return in Flow 4: Global Procurement of Asset item in Expense destination with Accrue on Receipt........................37

Return in Flow 4A: Global Procurement of Expense item in Expense destination with Accrue on Receipt ...............40

Flow 5: Global Procurement of Expense item in Expense destination with Accrue on Receipt ....................................42

Return in Flow 5: Global Procurement of Expense item in Expense destination with Accrue on Receipt ..................43

Flow 6: Global Procurement of one time item in Expense destination with Accrue on Receipt ....................................45

Return in Flow 6: Global Procurement of one time item in Expense destination with Accrue on Receipt ..................46

Flow 7: Global Procurement of one time item in Expense destination with Accrue at Period End ..............................47

Return in Flow 7: Global Procurement of one time item in Expense destination with Accrue at Period End ............49

Flow 8: Global Procurement with Shop Floor destination of OSP item – OSP charges at PO price............................51

Return in Flow 8: Global Procurement with Shop Floor destination of OSP item – OSP charges at PO price.........52

Flow 9: Global Procurement with Shop Floor destination of OSP item – OSP charges at standard rate .....................53

Flow 9: Global Procurement with Shop Floor destination of OSP item – OSP charges at standard rate .....................53

Return in Flow 9: Global Procurement with Shop Floor destination of OSP item – OSP charges at standard rate ...54

Flow 10: Global Procurement with Shop Floor destination of EAM direct item .............................................................. 55

Return in Flow 10: Global Procurement with Shop Floor destination of EAM direct item ............................................ 56


Slide 16




ProcureProcure--toto--PayPayOrderOrder--toto--CashCashBusiness CasesLogistics involved, examples

• Internal Buy and Sell Model• Inventory Replenishment

• Order additional stock of a certain product froman affiliate company

• Global Procurement• All item of a certain kind, e.g. commodities, are

purchased through a dedicated internal company


Slide 17




ProcureProcure--toto--PayPayOrderOrder--toto--CashCashBusiness CasesLogistics involved, examples

• Sales Agent Model• one company sells on behalf of manufacturing

company/companies� many different structures exist, here just examples

• (Customer) Drop Ship:

• one company takes the order from the customer, while another company delivers directly to thecustomer

• (Supplier) Drop Ship:

• one company takes the order from the customer, while a supplier belonging to another companydelivers directly to the customer


Slide 18

Highlighted Business Cases in Detail


Slide 19

“ Most of the steel and aluminum companies in Asia sell their Most of the steel and aluminum companies in Asia sell their

entire output to another marketing company. entire output to another marketing company.

Automobile industries are increasingly centralizing their Automobile industries are increasingly centralizing their

sourcing activities globally to leverage their combined volumes sourcing activities globally to leverage their combined volumes

for a better price from their suppliers. for a better price from their suppliers.

Trading companies are setup in tax haven nations to take Trading companies are setup in tax haven nations to take

advantage of bilateral and multiadvantage of bilateral and multi--lateral trade agreements to lateral trade agreements to

minimize the tax.minimize the tax.””

The following are fewexamples

(Oracle Intercompany InvoicingWhitepaper)

The following are fewexamples

(Oracle Intercompany InvoicingWhitepaper)


Slide 20

Business CasesFinancial transactions onlyCost Allocation: Costs to be shared across BU or Legal Entities

Example: central IT costs recharged to subsidiaries or BUs

in the same Set of Books

01.1220...

02.1420..

03.1420..

• Create a single GL Journalacross Balancing Segment Values (01, 02, 03)

• GL will create clearing Journal Entries to balance on each BSV (setup for natural I/C account)

• Accounting see next slide

• May or may not useIntercompany Qualifier in AFF

between Set of Books

02.1420.01..

03.1420.01..

01.1220.02..01.1220.03.

• Company 01:

• Sends I/C AR invoicesto company 02 and to company 03

• Posting to I/C receivableand Intercompany segment (no automaticbalancing)

• Company 02 and company 03:

• Receives I/C AP invoice fromcompany 01

• Posting to I/C payable and Intercompany segment (no automatic balancing)

• Pays the I/C invoice to company01

! This design is not valid for Europe; however it is being implemented by someAmerican companies also in Europe


Slide 21

AGIS Example Create Outbound Transactions

Batch Attachment

Transaction Attachment


Slide 22

General Ledger creates the following intercompany journal lines:

Line 4: 02.000.2600.000.01 300 (Payable due to 01)

Line 5: 03.000.2600.000.01 400 (Payable due to 01)Line 6: 01.000.1600.000.02 300 (Receivable due from 02)

Line 7: 01.000.1600.000.03 400 (Receivable due from 03)

Business CasesFinancial transactions only

• Accounting, with and without AFF qualifier

Post single GL Journal WITH INTERCOMPANY Qualifier:Line 1: 02.000.1725.000.00 300

Line 2: 03.000.1725.000.00 400

Line 3: 01.000.1725.000.00 700

Post single GL Journal WITHOUT INTERCOMPANY Qualifier :

Line 1: 01.000.1725.000 150Line 2: 02.000.1725.000 50

Line 3: 01.000.1725.000 125

Line 4: 03.000.1725.000 75

01.1220...02.1420..

03.1420..

MetalinkNote:151130.1

MetalinkNote:151130.1

General Ledger creates the following intercompany journal lines:Line 4: 01.000.2603.000 125 150 (Payable due to 03)

Line 5: 02.000.2603.000 50 (Payable due to 03)

Line 6: 03.000.1601.000 150 125 (Receivable due from 01)

Line 7: 03.000.1602.000 50 (Receivable due from 02)

Note on lines 4 and 6: Both the debit and credit amounts are on the line,rather

than the net, for performance reasons.


Slide 23

Business Business CasesCasesFinancial transactions only

• Invoice Split: Invoice to be split across BU or Legal Entities

• Example: electricity invoice expense split between BU A, BU B and BU C,

each BU having a separate Balancing Segment Value

in the same Set of Books

• Create a single AP invoiceacross Balancing Segment Values (01, 02, 03)

• System will create I/C Journal Entries to balance on each BSV (setup for natural I/C account)

• May or may not useIntercompany Qualifier in AFF

01.1220...

02.1220..

03.1220..

between Set of Books

• Company 01:

• Posts Supplier invoice

• Sends I/C AR invoicesto company 02 and to company 03

• Posting to I/C receivableand Intercompany segment (no automaticbalancing)

• Company 02 and company 03:

• Receives I/C AP invoice fromcompany 01

• Posting to I/C payable and Intercompany segment (no automatic balancing)

• Pays the I/C invoice to company01

01.1200...

01.1420.02..

01.1420.03..

02.1220.01..

03.1220.01..

! This design is not valid for Europe; however it is being implemented by someAmerican companies also in Europe


Slide 24

Business Business CasesCasesLogistics, Buy and Sell

• Inventory Replenishment• Order additional stock of a certain product from an affiliate

company

Single Intercompany• Receiving company sends internal PO to

shipping company

• Shipping company sends goods to

recieving company

• Shipping company creates intercompany

AR invoice

• Receiving company imports intercompany

AP invoice and pays it

�Note: the same I/C invoice is treated as

I/C AR invoice for Shipping Company and

I/C AP invoice for Receiving Company


Slide 25

Business CasesInventory Replenishment

Account Debit Account Credit Amount Debit Amount Credit

none none

none none

none none

COGS (Via Account

Generator) Inventory Valuation Transfer Price X Qty Transfer Price X Qty

<normal accounting from

costing>

Inventory Valuation I/C Accrual Unit cost X Qty (?) Unit cost X Qty (?)

none none

Intercompany ReceivablesIntercompany Revenue

Freight

Transfer Price X Qty +

Freight Amount

Transfer Price X Qty

Freight Amount

none none

I/C Accrual

FreightIntercompany Payable


Freight Amount


Freight Amount

Processing Steps OU

1 Generate Internal Requisition Rec.

2 Create an Internal Sales Order Rec.

3 Import Internal Sales Order Ship.

4

Process order

(schedule, pick, documents, ship, confirm...)

Note: optionally use intransit inventory

Ship.

5 Cost the transactions All

6 Receive goods Rec.

7 Run ‘Create Intercompany AR invoices’ Ship.

8 Run ‘Auto Invoice Master Program’ Ship.

9 Run ‘Create Intercompany AP invoices’ Ship.

10Run ‘Expense Report Import’ for Source

'Intercompany'Rec.

If you find any mistake in this please mail to: [email protected]


Slide 26

Business CasesLogistics, Buy and Sell

Global Procurement• All item of a certain kind, e.g. commodities, are purchased

through a dedicated internal company

Global Procurement • Receiving company sends internal PO

to Global Procurement company

• Global Procurement sends PO to

supplier

• Supplier sends goods to recieving

company

• Supplier sends AP invoice to Global

Procurement

• Global Procurement sends I/C AR

invoice to Receiving company

• Receiving company pays

intercompany AP invoice


Slide 27

Business CasesGlobal Procurement

Account Debit Account Credit Amount Debit Amount Credit

none none

none none

none none


costing>

Inventory Valuation I/C Accrual Purchase Price X Qty

or Transfer Price X

Qty

Purchase Price X Qty

or Transfer Price X Qty

Clearing Account (!) Accrual Account Purchase Price X Qty

or Transfer Price X

Qty



Accrual

Freight

Supplier Liability Purchase Price X Qty

Freight


+ Freight

none none

Intercompany Receivables Intercompany Revenue

Freight


Freight Amount


Freight Amount

none none

I/C Accrual

Freight

Intercompany Payable Transfer Price X Qty

Freight Amount


Freight Amount

�� Many different variations are possible,depending on the type of transaction and setup choices

Processing Steps OU

1Internal Purchase Requisition

to Global Proc. Off.Rec.

2 AutoCreate POGlobal

Proc. Off.

3 Approve POGlobal

Proc. Off.


8 Receive the material Rec.

Global

Proc. Off.

9 Receive Supplier Invoice Global

Proc. Off.

10 Run ‘Create Intercompany AR invoices’Global

Proc. Off.

11 Run ‘Auto Invoice Master Program’Global

Proc. Off.

12 Run ‘Create Intercompany AP invoices’Global

Proc. Off.

13 Run ‘Expense Report Import’ Rec.



Slide 28

Business CasesLogistics, Sales Agent

Drop Ship:

• One company takes the order from the customer, while a supplierbelonging to another company delivers directly to the customer(various definitions exist)

Drop Ship • Customer sends sales order to selling company

• Selling company sends internal PO to Procurement company or the order is scheduled to ship from a shipping warehouse associated with a different operating unit (Distribution Center)

• Distribution Center sends PO to supplier

• Supplier sends goods directly to customer

• Supplier sends AP invoice to Distribution Center

• Distribution Center sends I/C AR invoice to Sellingcompany

• Selling company pays intercompany AP invoice

• Selling Company sends third party AR invoice to customer

• Customer pays selling company


Slide 29

Business CasesLogistics

Processing Steps OU

1Enter, book the customer order

(Order set to External Source from Deliv. C.) Selling C.

2 Run "Import Requisition" Selling C.

3 AutoCreate PO Deliv. C.

4 Approve PO Deliv. C.


6 Logical PO receipt Deliv. C.

7 Logical Intercompany issue Deliv. C.

8 Logical PO receipt Selling C.

9 Logical Sales Order issue Selling C.

10

Create Customer Invoice

(Run 'AutoInvoice Master Program' with

Source Order Management)

Selling C.

11 Receive Supplier Invoice Deliv. C.

12 Run ‘Create Intercompany AR invoices’ Deliv. C.

13Run ‘Auto Invoice Master Program’ with

Source 'Intercompany'Deliv. C.

14 Run ‘Create Intercompany AP invoices’ Deliv. C.

15 Run ‘Expense Report Import’ Selling C.

Account Debit Account Credit Amount Debit Amount Creditnone none

none none

none none

none none


costing>

Inventory Valuation Accrual Account Purchase Price X Qty

or Transfer Price X

Qty



I/C COGS Inventory Valuation Purchase Price X Qty

or Transfer Price X

Qty



Inventory Valuation I/C Accrual Purchase Price X Qty

or Transfer Price X

Qty



COGS Inventory Valuation Purchase Price X Qty

or Transfer Price X

Qty



Receivable Revenue

Freight

Selling Price X Qty +

Freight

Selling Price X Qty

Freight

Accrual

Freight

Supplier Liability Purchase Price X Qty

Freight


+ Freight

none none

Intercompany Receivables Intercompany Revenue

Freight


Freight Amount


Freight Amount

none none

I/C Accrual

Freight

Intercompany Payable Transfer Price X Qty

Freight Amount


Freight Amount



Slide 30

Setups for Intercompany Invoicing –1-

• Define intercompany relations between the selling

and shipping operating units

• Define intercompany transaction flows

• Define price lists

• Define Oracle Receivables system options

• Define Oracle Payables system options

• Define tax structures in Oracle Payables and Oracle

Receivables

• Set up the Account Generator for the Cost of Goods

Sold accounts


Slide 31



Slide 32



Slide 33



Slide 34

Setups for Intercompany Invoicing –2-(may have changed)

• Profile Option: INV: Advanced Pricing for

Intercompany Invoice

• Profile Option: INV:Inter-company Invoice for Internal

Orders

• Profile Option: TAX:Allow Override of Tax Code

• Profile Option: Tax:Invoice Freight as Revenue

• Profile Option: Tax:Inventory Item for Freight


Slide 35

Attention Points

• AR System options: set salesrep required to „No“

• Don‘t change seeded AR Batch Source of „Intercompany“

• Inventory transactions are recorded when the order shipmentsare confirmed

• Currency should be from the receiving OU, it is set up in the„Intercompany Relations“ window

• Set up identical tax structures (tax codes and rates) in Oracle Payables and Oracle Receivables

• Set Profile Option: TAX:Allow Override of Tax Code

• Process all outstanding intercompany shipments before periodclose

• The transaction date stamp on the inventory shipmenttransaction is the transaction date in the invoice lines.


Slide 36


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Über mich

Christine DreyerOracle Consulting Düsseldorf

T: +49 211 74839 523

M: +49 177 5946 523

[email protected]


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