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1) Executive Summary
The globalization phenomenon has lead to geographical proliferation of trade and business. The business models have seen a paradigm shift. Today we have large number of business conglomerates operating in multi country and multi location model having complex business relationship among the entities inside and outside the conglomerate. This has resulted in structuring of highly networked business partnerships. The manufacturing and trading activities are spread across the globe to leverage the competitive advantages of different geographies and also target wider range of markets. Implementation of these business partnerships involves policy making on pricing, costing, regulatory framework and other strategic business areas. All these would necessitate a robust and clean way of initiating, tracking and controlling the business transactions within the businesss strategic framework as well as ensuring compliance of international laws. This paper aims to provide insights about the Transfer Price Accounting Framework available in Oracle E-Business Suite (11i10) and how effectively it can be used to meet these complex business requirements.
2) Concepts
In a divisionalised Organization, the managers of different investment centres are encouraged to operate them as separate economic entities. This separation will only rarely be complete, however, as goods and services are often provided by one division to another, particularly in a focused manufacturing environment. A value
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must obviously be placed on these intra-company transfers, and is known as transfer price. Transfer Price as a concept refers to the price at which one division sells goods/services to another division falling within same business group. Such pricing is required to measure more accurate profitability of the business divisions as well as meet the corporate and taxation laws of different countries. Typically manufacturing of goods might happen in one country centrally and sold across the globe through country subsidiaries. In such a scenario, the manufacturing division transfers goods to distribution divisions at a Transfer Price. This will ensure measurement of true profitability of the manufacturing division as well compute Return on Investment & other performance metrics of the division. What should be the Transfer Price? Transfer price depends mainly on two factors viz. a) The Business Policy on measurement of performance of selling division as well as buying division b) The transfer pricing laws in force in countries where they operate Ideally Transfer Price could be any of the following: a) Cost Based Pricing Marginal cost of production. It is cost of producing one additional unit Absorption Cost. It is the fully absorbed unit cost of production Standard Cost. It is the standard unit cost of production b) Market Based Pricing. It is price close to market price of the goods. The Transfer Prices typically undergoes scrutiny by the tax regulators in each country to ensure that the prices are at arms length relationship and does not result in leakage of revenue to government.
Oracle E-Business Suite conceptualizes following business relationships: Internal Order Transfers of Goods and Services Across Business Divisions International Drop Shipment of Goods and Services o Internal Drop Shipment o External Drop Shipment Shared Services Procurement or Global Procurement of Goods and Services
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Before we get into these business transactions here is a brief overview of business model architecture in Oracle E-Business Suite Oracle E-Business Suite facilitates a flexible multi product, multi location business configuration. Following is the hierarchy of different Business Entities in Oracle E-Business Suite: Business Groups Set of Books Legal Entities Operating Units Inventory Organizations
Business Groups represents the highest level at which the business operates. Set of Books represents the financial reporting framework within which the business transactions are performed Legal Entities represents the corporate identity of the business in a country. This is the level at which fiscal reporting is required Operating Units represent a business division or a vertical. It is the level at which financial and business policy making is configured. Typically business functions like Purchasing, Order Management, Accounts Receivable, Accounts Payable operates at this level. Inventory Organization represents the lowest level of business entity. It typically corresponds to a manufacturing facility or part there of, a trading unit or a storage/warehousing facility. This is the level at which products like Inventory, WIP, BOM and Cost Management operates. Now lets look into these business transactions in detail. Internal Order Transfers of Goods and Services Across Operating Units This business transaction represents transfer of goods between two inventory organizations falling in different operating units. For example the manufacturing unit might distribute goods to selling/distribution units each operating in different country. This business flow involves use of Internal Requisition and Internal Sales Order documents. These transfers
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could be at cost to sending Organization or at a Transfer Price. The Transfer Price is the selling price and the sending operating unit bills the receiving operating unit. Thus intercompany receivables and payables are created at transfer price by this transaction. International Drop Shipment of Goods and Services Drop shipment transaction represents a trading business model wherein the selling unit does not stock goods and they are delivered directly from another stocking inventory organization or an External supplier. Following are two variations of the Drop Shipment business transaction: o Internal Drop Shipment This involves supply of goods and services directly by the stocking operating unit (an entity within oracle implementation) to the customer. The selling operating unit does not stock the goods. For example manufacturing in one country and selling across the globe. The manufacturing unit ships to the customers directly. Note: Oracle EBS currently supports shipment from an Internal Organization (within oracle implementation) to external customer (not under oracle implementation). It doesnt support dropshipment from one internal organization to another internal organization within same Oracle Implementation. Oracle EBS customers can use Internal Order Flow functionalityas a workaround. o External Drop Shipment This involves supply of goods and services directly by the external supplier to the external customer. Both the selling operating unit as well as the procuring operating unit do not manufacture or stock the goods. For example, pure trading business models like wholesale distribution, wherein the distributor (oracle e-business customer) collects orders from customers and places a purchase order with supplier. The supplier directly delivers to distributors customers.
Shared Services Procurement or Global Procurement of Goods and Services Shared services procurement involves procurement of goods and services through a Centralized Procurement Unit. This would involve picking up
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requisitions from different inventory organizations in the business group by the central procurement unit and place a consolidated purchase order with the supplier. The aim is to ensure supply of quality goods and services at best possible price and at right time. Transfer Price Accounting Both Procurement and Drop shipment transaction requires transparent accounting in all the business units (Operating units/Inventory Organizations) involved at appropriate prices (Transfer Price/PO Price). These transactions may involve routing of intercompany financial obligations through different group subsidiaries to take advantage of tax benefits as well as to implement different business strategies. The functionality in Oracle E-Business Suite is based on the Intercompany transaction flow framework, which defines the accounting flow and the pricing policy involved. Procurement and Drop shipment flows also requires creation of appropriate business documents for ensuring a smooth business process and physical movement of goods/services. Accordingly, the Sales Order, Purchase Order and Purchase Requisition documents have been linked to establish a document trail and pointers for physical flow of goods and services.
To summarize Transfer Price accounting is supported for following business transactions: Internal Order Transfers across operating Units Implemented using Shipping Network and Intercompany Relations Global/Shared Service Procurement - Implemented Using Procurement Transactions Flow Internal Drop shipment Implemented Using Shipment Flow External Drop shipment Implemented Using Shipment/Procurement Flow
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Internal Order Transfers across operating Units Implemented using Shipping Network and Intercompany Relations Shipping Network with Internal Order Enabled Define the shipping inventory organization and receiving inventory organization Shipping Network Profiles Set Up CST: Transfer Pricing Option: Yes (Price as Incoming/Price Not as Incoming) INV: Intercompany Invoicing for Internal Orders: Yes Intercompany Relations Definition Operating unit belonging to sending organization as Shipping OU Operating unit belonging to receiving organization as Selling OU Price List association in Bill To relationship in Internal Customer defined in Intercompany Relations Intercompany Relations
International Drop Shipment of Goods and Services - Implemented Using Shipment/Procurement Transactions Flow Financial Flow Defined Using Transaction Flow Start OU is Supplier Facing End OU is Customer Facing/Receiving Org Intermediate OUs are Accounting Only OUs Type: Shipment/Procurement Pricing: Transfer Price for Shipment, Transfer Price/PO Price for Procurement Intercompany Transaction Flow Intercompany Relations Inter-company Relations Driven Inter Company Invoicing Old and New Accounting option for shipment flow Price List association in Bill To relationship in Internal Customer defined in Intercompany Relations
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Document Flow Defined Using Transaction Flow and Document Transaction (PO and SO) Physical Flow Defined Using Transaction Flow and Document Transaction (PO and SO) Global/Shared Service Procurement - Implemented Using Procurement Transactions Flow Financial Flow Defined Using Transaction Flow Start OU is Supplier Facing End OU is Customer Facing/Receiving Org Intermediate OUs are Accounting Only OUs Type: Procurement Pricing: Transfer Price/PO Price Intercompany Transaction Flow Intercompany Relations Inter-company Relations Driven Inter Company Invoicing Price List association in Bill To relationship in Internal Customer defined in Intercompany Relations Document Flow Defined Using Transaction Flow and Document Transaction (PO and SO) Physical Flow Defined Using Transaction Flow and Document Transaction (PO and SO)
4) Pricing Decision
Internal Order Transfers across operating Units Pricing options available are a. At Cost to Sending Organization Profile CST: Transfer Pricing Option defined as No b. At Transfer Price Profile CST: Transfer Pricing Option defined as Yes, Price as Incoming Cost Profile CST: Transfer Pricing Option defined as Yes, Price not as Incoming Cost International Drop Shipment of Goods and Services a. These transactions are always at Transfer Price because all drop ship transactions are driven by an underlying external sale transaction. The
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core purpose being sale, the intra-company transfers are also deemed as sale. Global/Shared Service Procurement a. These transactions could be at PO Price or at Transfer Price as they can be for an underlying demand to stock goods/use for further manufacture or could be driven by an underlying external sale. b. Typically PO Price may be used if the underlying demand is to stock goods/use for further manufacture and Transfer Price may be used if the underlying demand is driven by an underlying external sale Transfer Price Definition The Transfer Price could either be a Static Price or a Formula based price. a. Static Price is the price defined in the price list associated in Bill To relationship in Internal Customer defined in Intercompany Relations b. Formula Based price is application of a Pricing Modifier on top of the Static Price. The applicability of the modifier is governed by profile INV: Advanced Pricing Option. Please refer to white paper Intercompany Invoicing and Advance Pricing Integration detailing this functionality avaiable in Metalink. c. Customized APIs could also be used to derive the Price based on the Cost in sending organization reflecting the cost based pricing discussed earlier in this paper.
Average Costing
Transaction Internal Order Shipment (FOB Shipment) Internal Order Receipt (FOB Shipment) Sending Org Dr Cost of Goods Sold (COGS) @ Current Avg Cost Cr Inventory Receiving Org Dr Intransit Inventory @ Transfer Price Cr Accrual Dr Inventory @ Current Avg Cost Cr Intransit Inventory
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Transaction Internal Order Shipment (FOB Receipt) Internal Order Receipt (FOB Receipt)
Sending Org Dr Intransit @ Current Avg Cost Inventory Cr Inventory Dr Cost of Goods Sold (COGS) @ Current Avg Cost Cr Intransit Inventory
Receiving Org
Standard Costing
Transaction Internal Order Shipment (FOB Shipment) Sending Org Dr Cost of Goods Sold (COGS) @ Std Cost Cr Inventory Receiving Org Dr Intransit Inventory @ Std Cost Receiving Org Cr Accrual @ Transfer Price Dr/Cr PPV Account Dr Inventory @Std Cost Receiving Org Cr Intransit Inventory
Internal Order Receipt (FOB Shipment) Internal Order Shipment (FOB Receipt) Internal Order Receipt (FOB Receipt)
Dr Intransit @ Std Cost Inventory Cr Inventory Dr Cost of Goods Sold (COGS) @ Std Cost Cr Intransit Inventory
Dr Inventory @ Std Cost Receiving Org Cr Accrual @ Transfer Price Dr/Cr PPV Account
Intercompany Invoicing
Transaction Intercompany AR Invoice Intercompany AP Invoice Shipping Operating Unit Dt I/C Receivable @ Transfer Price Cr I/C Revenue Dr Accrual @ Transfer Price Cr I/C Payable Selling Operating Unit
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Sending Org Dr Cost of Goods Sold (COGS) @ Current Avg Cost Cr Inventory
Internal Order Receipt (FOB Shipment) Internal Order Shipment (FOB Receipt) Internal Order Receipt (FOB Receipt)
Receiving Org Dr Intransit Inventory @cost to sending org Cr Accrual @ Transfer Price Dr/Cr Profit in Inventory (TP Cost to sending org) Dr Inventory @ Current Avg Cost Cr Intransit Inventory
Dr Intransit @ Current Avg Cost Inventory Cr Inventory Dr Cost of Goods Sold (COGS) @ Current Avg Cost Cr Intransit Inventory
Dr Inventory@cost to sending org Cr Accrual @ Transfer Price Dr/Cr Profit in Inventory (TP Cost)
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Internal Order Receipt (FOB Shipment) Internal Order Shipment (FOB Receipt) Internal Order Receipt (FOB Receipt)
Receiving Org Dr Intransit Inventory @Std Cost Receiving Org Cr Accrual @ Transfer Price Dr/Cr Profit in Inventory (TP Std Cost in Sending Org) Dr/Cr PPV Account @ (Std Cost in Sending org Std Cost in Receiving Org) Dr Inventory @Std Cost Receiving Org Cr Intransit Inventory
Dr Intransit @ Std Cost Inventory Cr Inventory Dr Cost of Goods Sold (COGS) @ Std Cost Cr Intransit Inventory
Dr Inventory@ Std Cost Receiving Org Cr Accrual @ Transfer Price Dr/Cr Profit in Inventory (TP Std Cost in Sending Org) Dr/Cr PPV Account @ (Std Cost in Sending org Std Cost in Receiving Org)
Intercompany Invoicing
Transaction Intercompany AR Invoice Intercompany AP Invoice Shipping Operating Unit Dt I/C Receivable @ Transfer Price Cr I/C Revenue Dr Accrual @ Transfer Price Cr I/C Payable Selling Operating Unit
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For example say the Cost in sending org is USD80 Transfer Price is USD100
The Accounting Entry in Sending Org will be Dr Cost of Goods Sold USD 80 Cr InventoryUSD 80 Dr I/C Receivable USD 100 Cr I/C Revenue USD 100 The Accounting Entry in Receiving Org will be Dr Inventory: USD80 Dr Profit in Inventory USD 20 Cr Inter Org Accrual USD 100 Dr Inter Org Accrual USD 100 Cr I/C Payable: USD 100
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Ultimately there will be two adjustments involved: Receiving organization adjusting its inventory by allocating the PII account balance on sound business principles based criteria. Write off the entire balance in PII account to P&L account of receiving company, in which case the inventory valuation would still be deflated, but would reflect true profits. Going by conservative accounting principles, the lower inventory valuation may not reflect an unfair view of financial statements. (OR) Acertain the ratio of COST OF GOODS SOLD (COGS) to CLOSING STOCK (for each intercompany relation) and apportion the PII account balance between these two. The amount allocated to COGS should be written off in P&L account and the amount allocated to Closing Stock should be added to Inventory through a cost update process. This will ensure more accurate profits and inventory valuation for receiving company Consolidated financial statements to net out Intercompany Revenue, Intercompany COGS and PII account using Intercompany Balancing segment without touching the inventory. This way we can leverage oracle consolidation engine.
Margin Analysis report for the Receving company tracking the resale, would show margins based on original cost and not based on the TP. If TP based margin analysis needs to be tracked, PII accounting should not be opted.
Alternatively if the PII accounting is not used i.e CST: Transfer Pricing Option is set to Yes, Price as Incoming Cost then inventory valuation is correct from receiving organization perspective. Margin analysis in receiving org too would be correct. But the Consolidation process would suffer. Since there is no explicit accounting, the customer should adopt a manual process to build PII account balance using margin analysis report of sending org and other accounting information. Based on that perform following adjustments: Net out the intercompany receivables and Payables in the consolidated financial statements using intercompany segment Adjust the consolidated inventory to the extent of unsold stock using the Manual PII computation again based on sound business principles
Advanced Pricing profile set to Yes. Again, QP: Advanced Pricing profile set to Yes works only for Transfer Price. The business logic driving this
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treatment could be that transfer price is underlined a by sale transaction. So the parties to the transaction should be given an option to select the currency of payment obligation. In case of PO Price option, the payment obligation is fixed in the currency of PO. Hence logically currency option need not be supported for PO pricing as purchasing is back-to-back transfer of goods But for the combination transfer price option and QP price set to 'No', the currency code option is not extended. The principle underlying the Currency Code Option is use of Transfer Price for valuing the obligations. Since Transfer Price can be a static price (where QP profile is not used), still the parties to the transactions would like to have option of selecting the currency of payment obligation. So it is ideal to extend Currency Code option to all Transfer Pricing cases irrespective of QP: 4Advanced Pricing Profile.
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Inter Company COGS - This account is used for passing the logical shipment entry in Sending Org. This will override the COGS account defined at different levels. This account is offset at the time of Financial Statements Preparation. Inventory AP Accrual Account - This account is used for passing accrual entries in supplier facing Org for Inventory Destination. This Account is however not used under Global Procurement and Drop ship Scenarios. Expense AP Accrual Account - This account is used for passing accrual entries in supplier facing Org for Expense Destination. This Account is used for PO created under Global Procurement/Drop Ship irrespective of Destination type in receiving Org. This is due to the fact that accounting in Supplier facing org is Destination Neutral. Inter Company Payable Account - This account is used for creating Inter Company AP Invoicing Entries. Inter Company Receivable Account - This account is used for creating Inter AR Invoicing Entries.
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Start OU (Supplier Facing) Logical PO Receive Logical I/C Sales Order Issue Physical RMA
Intermediate OU Logical I/C Shipment Receipt Logical I/C Sales Order Issue Logical I/C Sales Order Return Logical I/C Receipt Return
End OU (Customer Facing) Logical I/C Shipment Receipt Logical Sales Order Issue Logical RMA Logical I/C Receipt Return
RMA Receipt
RTV
Physical RTV
PO Receipt
Logical PO Receive
Logical I/C Sales Order Issue RMA Receipt RTV Logical RTV
Logical I/C Procurement Receipt Logical I/C Sales Order Issue Logical I/C Sales Order Return
Logical I/C Procurement Receipt Logical Sales Order Issue Physical RMA Physical RTV
Global Flow
Procurement
PO Receipt
RTV
PO Receipt
Logical I/C Procurement Return Logical PO Receive Logical I/C Physical PO Receipt Procurement Receipt Logical I/C Sales Logical I/C Sales Order Issue Order Issue Logical RTV Logical I/C Physical RTV Procurement Receipt Logical I/C Sales Order Issue There will be two legs of transaction flow viz. Procurement and Shipment. For Procurement Leg, the events mentioned in Global Procurement above are triggered. For Shipment Leg, the events mentioned in Extenral Drop Shipment using Shipment Flow are triggered.
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Business Flow Internal Drop shipment using Shipment Flow New Accounting
Intermediate OU Logical I/C Shipment Receipt Logical I/C Sales Order Issue Logical I/C Sales Order Return Logical I/C Receipt Return
End OU (Customer Facing) Logical I/C Shipment Receipt Logical Sales Order Issue Logical RMA Logical I/C Receipt Return
RMA Receipt
Physical RMA
Internal Drop shipment using Shipment Flow Old Accounting Internal Order Transfer
Sales Shipment
Order
Not Supported
Internal Receipt
Order
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Dr OU Clearing Cr Supplier Accrual or I/C Accrual Dr Inventory Cr OU Clearing Dr Inventory Cr I/C Accrual Dr Inventory Cr OU Clearing Dr I/C COGS Cr Inventory Dr COGS Cr Inventory Cr OU Clearing Dr Supplier Accrual or I/C Accrual Cr Inventory Dr OU Clearing Dr Inventory Cr I/C COGS Dr I/C Accrual Cr Inventory Dr OU Clearing Cr Inventory
Shipment
PO Receipt/ SO Shipment
Procurement
Logical I/C Shipment Receipt PO Receipt Logical I/C Procurement Receipt PO Receipt/ Logical I/C SO Shipment Sales Order Issue PO Receipt/ Logical Sales SO Shipment Order Issue Return To Logical RTV Vendor
PO Price for Supplier Facing OU and TP/PO Price for Receiving OU PO Price for Supplier Facing OU and TP/PO Price for Receiving OU Transfer Price
RMA Receipt
Logical I/C Sales Order Return Logical I/C Receipt Return Logical I/C Procurement Return
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Entry
Value
Shipment Shipment
Shipment
RMA Receipt
Logical RMA
Dr Receiving Inventory Cr Supplier Accrual or I/C Accrual Dr Inventory Cr Receiving Inventory Dr COGS Cr Inventory Dr Inventory Cr COGS or I/C COGS Dr Inventory Cr COGS Dr I/C Accrual Cr Inventory
PO Price
PO Price for Supplier Facing OU and TP/PO Price for Receiving OU Transfer Price PO Price of the Drop ship PO Transfer Price Transfer Price
I/C AR Invoice Request and Auto Invoice Request I/C AP Invoice Request and Expense Report Import Auto Invoice Request Invoices
I/C Invoice
AR
Shipment TP Procurement TP/PO Price Internal Order TP/Cost Shipment TP Procurement TP/PO Price Internal Order TP/Cost
I/C AP Invoice
AR Invoicing AP Invoicing
SO Price PO Price
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PO: Start OU, Ship To: End OU Org PO: Start OU, Ship To: End OU Org (in Procurement Flow) PO: Start OU, Ship To: End OU Org
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Supplier to Customer
External Drop shipment using Shipment and Procurement Flow Internal Drop shipment using Global Procurement Flow Internal Drop shipment using Shipment Flow Internal Drop shipment using Shipment and Procurement Flow
Supplier to Customer
Supplier to Selling OU Selling OU to Customer Sending OU to Customer Supplier to Intermediate Physical Receiving OU Intermediate Physical Receiving OU to Customer Supplier to Receiving OU
Global Procurement
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User Interface View Receiving Transactions Summary (PO OU) View Material Transaction (Procuring/Selling/Receiving/ OU) Receiving Account Distribution Report (PO OU) Margin Analysis Report
To view the Supplier and Intercompany Accrual Accounting Events To View the Logical Inventory Events through Parent Transaction. The Distributions viewed through Parent Transaction (Trigerring event) displays the accounting for all logical events created in the transaction flow To view the Supplier and Intercompany Accruals To track inter operating unit dropship sales margins
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Shipping Network
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White Papers a) Overview of Inter Company Invoicing b) Intercompany Invoicing and Advance Pricing Integration User Guides Release 11i10 a) Cost Management User Guide b) Inventory User Guide c) Purchasing User Guide
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Transfer Price Accounting in Oracle SCM Feb 2006 Author: Oracle India Cybergateway Hyderabad, India Shyamsundar.santhanam@oracle.com Worldwide Inquiries: Phone: +1.650.506.7000 Fax: +1.650.506.7200 www.oracle.com Oracle is a registered trademark of Oracle Corporation. Various product and service names referenced herein may be trademarks of Oracle Corporation. All other product and service names mentioned may be trademarks of their respective owners. Copyright 2006Oracle Corporation All rights reserved. Shyam Sundar Santhanam, Project Leader, Cost Management Quality Assurance Special Thanks to Cost Management PM, Development and QA for supporting my work on this paper.