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Invoicing
An Oracle White Paper
July 2005
Overview of Intercompany Invoicing
EXECUTIVE SUMMARY...................................................................................................................................................... 1
INTRODUCTION ................................................................................................................................................................... 1
BUSINESS FLOWS................................................................................................................................................................ 14
External Drop Shipment......................................................................................................................................................... 14
Global Procurement (Central Procurement) ....................................................................................................................... 19
Internal Drop shipment (Central Distribution) .................................................................................................................. 23
Internal Fulfillment .................................................................................................................................................................. 27
CONCLUSION ....................................................................................................................................................................... 31
ADDITIONAL RESOURCES............................................................................................................................................. 31
ii
Figure 4 - Advanced Accounting enabled.............................................................................................................................. 5
Figure 5 - Intercompany Transaction Flow ........................................................................................................................... 5
Figure 6 - Logical Material Flow.............................................................................................................................................. 5
Figure 7 - Customer - Supplier relationship........................................................................................................................... 6
Figure 8 - Possible intercompany transaction flow options................................................................................................ 8
Figure 9 - Logic for Transfer Price.......................................................................................................................................... 9
Figure 11 - External Drop shipment..................................................................................................................................... 15
Figure 14 - Central Procurement ........................................................................................................................................... 19
Figure 15 - Central Distribution ............................................................................................................................................ 23
Figure 16 - Internal Orders..................................................................................................................................................... 27
Figure 17 - Internal Sales Orders Flow Not Supported .................................................................................................... 29
iii
Intercompany Invoicing
EXECUTIVE SUMMARY
More and more companies are doing business globally, and taking advantage of the operations and tax benefits
that can be achieved by running operations throughout the world. These companies have multiple operating
units and organizations around the world. When goods are shipped or received, the financial ownership
through these organizations does not necessarily follow the physical movement of goods. Oracle Applications
support three main logistics needs of global organizations – Central Distribution, Central Procurement and
Drop Ship. This whitepaper details the modeling of the global logistics in Oracle Applications as in 11.5.10.
INTRODUCTION
A corporation manages its global operations in various countries through a network of subsidiaries, separate
legal entities, licensees and several associated label franchisee. This complex network of operations is
necessitated to take care of local legal and fiscal environment, which prevail in each of those countries.
Following are few examples:
• In tele-communications industry, most of the countries stipulate mandatory domestic company partnership.
• Most of the steel and aluminum companies in Asia sell their entire output to another marketing company.
• Automobile industries are increasingly centralizing their sourcing activities globally to leverage their
combined volumes for a better price from their suppliers.
• Trading companies are setup in tax haven nations to take advantage of bilateral and multi-lateral trade
agreements to minimize the tax.
Consider the following two examples:
Example 1
Vision Operations (V1) is based in USA. It has a 100 % owned subsidiary company called Vision Asia (VA).
VA in turn has two subsidiaries – Vision Japan (VJ) and Vision China (VC). VJ has manufacturing facilities in
Osaka (O1) and distribution center at Tokyo (T1). Due to tax advantages, V1 sources all the goods from china
through VJ. Though the financial transactions between V1 and VC are routed through VJ, logistic movement
of goods takes place directly between V1 and VC.
Example 2
Continuing the above example, Vision Operations (V1) has another subsidiary company called Vision
Singapore (VS), 100 % that it owns. Individual plants procure components from their own suppliers. VS
centralizes all the commodity (like steel, Aluminum etc.,) procurement needs of Vision Operations across
A key requirement for the global implementation of Oracle applications in such a complex business
environment is the ability to process "intercompany transactions," where one business unit invoices another for
transfer of goods and services. Often these intercompany transactions involve transactions related to general
expenses, funds transfer, salary transfers, asset transfers, royalty payments and product transfers. This paper
discusses only those intercompany transactions that are related to product transfers such as sales of goods and
internal procurement.
This paper provides setup steps, implementation tips, and guidance for coordinating the many departments,
which become involved with intercompany invoicing. We would be discussing implementation of
intercompany invoicing for the fictitious organization as depicted in Figure 1.
Following are the key implementation points you need to look into:
• Understand the corporation business entities and the relationship between them. Identify selling-
shipping relationships and procuring-receiving relationships.
• Understand Oracle multi org structure and the building blocks in data structure.
• Breakup the business relationships into manageable process flow and map it to various entities in
Oracle applications.
• Consider how your designs 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 your business
processes and system transactions will flow throughout your applications worldwide.
The intercompany transaction flow establishes the physical flow of goods and financial flow relationship
between two operating units. The intercompany transaction flow establishes the relationship between one
operating unit (known as Start Operating Unit) and another operating unit (known as End Operating Unit)
about the actual movement of goods. Similarly, it also establishes the invoicing relationship between Start
Operating Unit and End Operating Unit.
Intercompany transaction flow is of two types – shipping flow and procuring flow. You need to setup
intercompany transaction flow of type shipping when selling operating unit is different from shipping operating
unit. You need to setup intercompany transaction flow of type procuring when buying operating unit is
different from receiving operating unit.
At each pair of intercompany relationship, you will define the intercompany accounts, and currency code to
be used on AR and AP invoices.
Note that in Figure 5 - Intercompany Transaction Flow, physical goods never flow through intermediate
operating unit. Oracle creates ‘Logical Material Transactions’ between the operating units, based on which
intercompany invoices between multiple operating units are raised. No logical transactions will be created when
you do not choose ‘Advanced Accounting’. For example, the transactions in Figure 4 can be broken down as
depicted in Figure 6.
Logical transactions are useful to record financial transactions between two operating units without physical
movement of goods. For example, in Figure 6 - Logical Material Flow, Vision Japan is an intermediate
operating unit through which no physical goods flow. However, it is a financial intermediate node, which is
involved in intercompany invoice flow. To facilitate accounting in the intermediate OUs, logical intercompany
For example, in Figure 7, you need to define Vision Japan as a customer in Vision China operating unit.
Similarly, Vision China should be defined as a supplier in Vision Japan. When you define an intercompany
relationship between Vision Japan and Vision China, actually you are establishing an internal customer and
supplier relationship. Similar is the case for every intercompany relationship in an intercompany transaction
flow. However, at present intercompany invoicing does not support any sales credit check.
For each transaction relationship between two nodes, you can define the following:
1. For Relationship between nodes:
a. From Operating unit
b. Inventory Org of From operating unit
c. To Operating Unit
d. Inventory Org of To Operating unit. (Not mandatory if the ‘Advanced Accounting is set
to No).
If advanced accounting flow is set to ‘No’ at Intercompany Transaction Flow header, then you can
define only one pair of From Operating unit and To operating unit.
2. For AR invoicing:
a. Customer (Bill – To customer)
b. Customer Number
c. Customer Location
You can create additional transactional flows between operating units by defining item category for each
intercompany transaction flow.
Oracle uses the same logic as mentioned in figure 9. In addition to the above, oracle uses the following logic to
determine the transfer price and subsequent AR invoicing.
Scenario Logic
Drop Shipment Sales Order and Advanced If profile "INV: Use Model & Options for Configuration
Accounting set to ‘No’. Pricing" is ‘Yes’, use price of model and price of options and
create invoice lines for each model and option.
If profile is "No" use configured item's price and create one
invoice line for configuration item. Price of options is not
mentioned.
Even if you maintain a price for the ‘* item’ (i.e., configured
item), system ignores it.
Drop Shipment Sales Order and Advanced System looks for the price of the ‘* item’ (i.e, configured item)
Accounting set to ‘Yes’. and creates one invoice line for configured item. If the price of
the ‘* item’ is not found or is equal to 0, then system rolls up
the price of model and price of options and creates one invoice
line for configuration item.
Global Procurement and Advanced System rolls up the price of model and price of options and
Accounting set to ‘Yes’. creates one invoice line for configuration item.
Global Procurement and Advanced Not Supported.
Accounting set to ‘No’.
Internal Orders with Advanced Accounting System looks for the price of the ‘* item’ (i.e, configured item)
set to ‘Yes’. and creates one invoice line for configured item. You need to
create a price list by rolling up the price of options and model
(manually).
Internal Orders with Advanced Accounting System looks for the price of the ‘* item’ (i.e, configured item)
set to ‘No’. and creates one invoice line for configured item. You need to
create a price list by rolling up the price of options and model
(manually).
Freight
Freight charges can be added to the intercompany invoice only for shipping flows. Auto-invoice will apply
freight only if you set ‘Allow Freight’ field to ‘Yes’ in the AR transaction type defined at the intercompany
transaction relationship between two operating units. You need to define an inventory item with user type as
“Freight”. Then assign this item in the profile “Tax: Invoice Item as Freight”. You need to setup a modifier of
type “Freight and Special Charge List” and define the freight charge for the “Freight Item”. Freight is a line
Tax
You can also apply tax to intercompany invoices. Auto-invoice will apply taxes only if you set ‘Tax Calculation’
field to ‘Yes’ in the AR transaction type defined at the intercompany transaction relationship between two
operating units. Auto-invoice looks for a tax code in the following order, stopping at the first place where it
finds a tax code:
1. Ship-To-Site
2. Bill-To-Site
3. Customer
4. Item
If you do not want tax to be calculated on freight lines, make sure that the profile option “Tax: Invoice Freight
as Revenue” is set to No. If this is set to Yes, AR creates a line item of type 'Line' on the invoice for the freight
amount and the tax will be calculated on the freight line. If the profile is set to No, then the system will create a
line item of type ‘Freight’. Logic for determination of Tax Code for the freight will be same as that of any other
invoice line item.
You need to setup the same tax structures (tax codes and rates) in Oracle Receivables and Oracle Payables.
This will allow AR invoices to be correctly mirrored into intercompany Oracle Payables.
You can offset the tax liability on the AP invoice for VAT purposes. For example, an office in an EU state
paying an intra EU invoice can assign a VAT tax and a corresponding Offset tax to an invoice, so it can record
and report VAT taxes without actually paying any to other operating unit. If the tax code on the AP invoice
line has an associated offset tax and if you enabled the ‘Use Offset Tax’ check box for the supplier site, system
creates a default offsetting tax distribution for each tax distribution on an invoice. You can use offset taxes to
record the value added tax (VAT) name and amount without paying VAT to other operating unit (the tax
distribution and the offset tax distribution net to zero). For example, in the Tax Codes window, you can define
an offset tax code named Offset 10 that has a negative 10% rate. You can then define a user-defined tax called
VAT 10 that has a 10% rate. You can assign the Offset 10 tax to the VAT 10 tax.
A separate business flow should be identified to treat other charges like insurance, handling charges that affect
only one organization and does not affect other organization. For example, custom duties need to be paid on
the intercompany invoices in international transactions. Handling of customs duty should be treated as a
separate processes from intercompany invoices.
Currency
You have different currency options to be used in an intercompany invoice. The attributes that determine
which currency to be used in an intercompany invoice for shipping flow are the profile option “INV:
Advanced Pricing for Intercompany Invoice” and “Currency Code” attribute in intercompany transaction flow.
The attributes that determine on the currency to be used in an intercompany invoice for procuring flow are the
profile option “Intercompany: Use Advanced Pricing” and “Currency Code” and “Pricing Option” attributes
in intercompany transaction flow.
For procuring flows, currency will be determined by the following decision table:
Flow Pricing Option Use Advanced Currency code in Intercompany Currency Code in AR
Type Pricing Profile Transaction Relationship Invoice
Procuring PO Price N Does not matter Purchase Order
Currency
Procuring Transfer Price N Does not matter Currency Code
mentioned in the price
list
Procuring Transfer Price Y Procuring / Shipping Operating Unit Procuring Operating
Unit Currency Code
Procuring Transfer Price Y Receiving / Selling Operating Unit Receiving Operating
Unit Currency Code
Procuring Transfer Price Y Order Currency Code Purchase Order
Currency
Procuring PO price Y Does not matter Purchase Order
Currency
Summary Of Profiles
This section summarizes all the profiles used in the intercompany invoicing flows:
Profile Values Description
INV: Advanced Pricing for Yes, No If set to Yes, then system looks for the
Intercompany Invoice transfer price in QP. If set to No, then
system uses the static price. See the section
on Transfer price. System looks for this
profile in the ‘From operating unit’ of each
intercompany relation in the intercompany
transaction flow.
INV: Intercompany Currency System uses this currency conversion code
Conversion for conversion. For example, the currency
code in the static price list is EUR and an
intercompany invoice has to be created in
USD, then system will look into this
Conversion Code for exchange rates.
System looks for this profile in the ‘From
operating unit’ of each intercompany
relation in the intercompany transaction
When you implement intercompany invoicing, following key points need to be noted:
• Identify the ‘Internal Sales Orders’; ‘Procure-to-Pay’ and ‘Order-to-Cash’ business flows.
• Identify the parties involved in the business flow – whether the business flow cuts across multiple business
units or involves only one operating unit.
• Identify the need for intercompany invoicing between different business units involved in the process
flow. If three or more business units are involved in a process flow, then you need to use ‘Advanced
Accounting’ option for the intercompany transaction flow. If only two business units are involved, using
‘Advanced Accounting’ option will give you more transparency in material flow.
• Examine the intercompany invoice entries. You need to look at the following entities – transfer price,
freight, tax and currency.
• Determine the logic for transfer price. Determine whether the standard options can be used. Otherwise
customize the logic for determination of the transfer price.
• Determine the accounting standard about the treatment of freight – whether freight needs to be treated as
revenue.
• Determine the tax applicable and develop a standardize tax codes across business units so that tax in AR
invoice is mirrored correctly into AP invoice.
• Determine the currency to be used in the invoice.
BUSINESS FLOWS
Lets look at various business processes that need intercompany invoicing and their mapping in Oracle. We
would be looking at the business process, corresponding system transactions and their accounting entries.
An example of external drop shipment for asset items is depicted in Figure 11. Assume that the customer is
from Germany and places an order on Vision Operations (V1). The order currency is EUR. To fulfill this order
Vision China (VC) places a Purchase order and drop ships the goods from its contract supplier based in
Thailand to the customer in Germany. The currency of the PO is THB. VC sends an invoice at transfer price
to Vision Japan (VJ) and the invoice currency is CNY. VJ in turn sends an invoice at the transfer price to V1
and the invoice currency is USD.
External drop shipment business flow depicted in Figure 11 is summarized in the following table:
Step Description
A Customer places an order on V1.
B Sales order is scheduled to be shipped from a supplier of VC.
C VC raises a PO on supplier. Purchase price is 400 THB.
D Supplier ships the goods directly to the customer.
E V1 invoices the customer. Selling price is 20 EUR.
F Supplier sends an invoice to VC.
G VC issues an intercompany receivable invoice to VJ at transfer price of 150 CNY.
H VJ issues an intercompany payable to VC.
I VJ issues an intercompany receivable invoice to V1 at transfer price of 20 USD.
J V1 issues an intercompany payable to VJ.
System Transactions
Above business steps can be mapped to following system transactions:
Step Process Responsible Description
1 Enter, book the customer V1 Order Record the order header and order line. Order currency
order management is EUR. Source at the order line is set to External and
receiving inventory Org is S1 belonging to operating
unit VC.
2 Run ‘Import Requisition’ VC Purchasing This program creates requisition for the sales order.
Source needs to be set as ‘Order Entry’. Make sure that
item has a list price setup.
3 Run ‘Auto Create PO’ VC Purchasing Convert the requisition to the PO. Check the supplier
Flow 3 – Global Procurement of asset items with inventory destination and accrue on receipt
Central Procurement shared services is depicted in Figure 14. Vision Singapore (VS) acts as a shared
procurement office for all the operating units across the world for commodities. It aggregates its global
requirement and leverages this buying volume for better contracts with the supplier. It centrally plans for the
material and places a Purchase Order on the supplier with deliveries to be made in each manufacturing plant
across the globe. A manufacturing plant will receive the material for the Purchase Order placed by VS.
System Transactions
Above business steps can be mapped to following system transactions:
Step Process Responsible Description
1 Purchase Requisition VC Purchasing VC raises a purchase requisition, requesting VS to raise
a PO.
2 AutoCreate PO VS Purchasing VC runs AutoCreate PO process, which results in a PO
in VS.
Note that it is not the shared service, which runs the
AutoCreate Concurrent program, but the requesting
organizations that run the AutoCreate PO.
For example, Vision China (VC) is the central distribution company for the entire Vision group of companies.
Vision Operations (V1) books the sales order and VC ships the goods to customer. VC invoices Vision Japan
(VJ) at transfer price and VJ in turn invoices V1 at transfer price. V1 raises a sales invoice and sends it to the
customer.
4 Cost the transactions VC Costing All the logical transactions need to be costed.
VJ Costing
V1 Costing
5 Create Intercompany AR VC Inventory Run ‘Create Intercompany AR invoices’. This program
invoices VJ Inventory can be run mutually exclusive in both operating units
i.e., you can still run VC intercompany AR program
before VJ intercompany AR.
The currency of the intercompany AR invoice is based
on the parameter ‘Currency Code’ for each
intercompany relation line. Therefore, the intercompany
relation line between VC and VJ should be ‘Currency
Code of From Operating unit’ and that between VJ and
V1 should be ‘Currency Code of To Operating unit’.
This setup ensures that the AR invoice generated
between VC and VJ is in CNY and between VJ and V1
is USD.
The exchange rate used for the conversion of the
transfer price into intercompany AR currency is based
on date the invoice date.
AR intercompany invoice cannot be created for the
following reasons:
1. Logical transactions are not created.
2. Transactions are not costed.
3. Transfer price cannot be determined. Check that
the transfer price is correctly setup.
4. Exchange rate could not be determined.
This successfully populates AR interfaces tables. Check
for freight and tax codes.
6 Run ‘Auto Invoice Master VC Receivables Once this program is run successfully, you will see the
Program’ VJ Receivables intercompany AR invoice in Oracle Receivables.
AutoInvoice will use AR grouping rules to group
various AR invoices and orders the invoice lines using
line-ordering rules.
7 Create AP intercompany VJ Inventory This program populates AP interface tables. Only those
System Transactions
Above business steps can be mapped to following system transactions:
Step Process Responsible Description
1 Run Mi-Max Planning M1 Inventory Min-Max planning will generate an internal requisition
Report depending on the Min-Max setting and on-hand
quantity.
2 Run ‘Import Requisition’ V1 Purchasing Import the internal requisition.
request
7 Confirm shipment of the S1 Shipping Check that the shipping network between S1 AND M1
goods is of type ‘In-Transit’.
No intercompany invoice will be created if the shipping
network is of type ‘Direct Transfer’.
8 Receive the goods M1 Inventory Receive the goods.
9 Cost the transactions S1 Costing Check that the cost manager is running and has costed
the internal sales order issue.
10 Create Intercompany AR S1 Inventory Run ‘Create Intercompany AR invoices’.
invoices The currency of the intercompany AR invoice is based
on the parameter ‘Currency Code’ for in intercompany
relation line.
The exchange rate used for the conversion of the
transfer price into intercompany AR currency is based
on date the invoice date.
AR intercompany invoice cannot be created for the
following reasons:
1. Transactions are not costed.
2. Transfer price cannot be determined. Check that
the transfer price is correctly setup.
3. Exchange rate could not be determined.
4. You have defined multiple intermediate nodes.
This successfully populates AR interfaces tables. Check
for freight and tax codes.
11 Run ‘Auto Invoice Master S1 Receivables Once this program is run successfully, you will see the
Program’ intercompany AR invoice in Oracle Receivables.
12 Create AP intercompany M1 Inventory This program populates AP interface tables.
invoices
13 Run ‘Expense Report M1 Payables This program generates intercompany AP invoice and
Import’ you will see the intercompany AP invoice in Oracle
Payables.
Check that the transfer price in AP invoice is same that
of AR invoice. If you do not see the tax correctly, then
it means that the tax structure in From operating unit is
not same as To operating unit. Therefore, check that tax
codes and rates are the same in both operating unit. The
tax codes should be spelled the same with matching
upper case and lower case.
Scenario 4 – Global Procurement for projects with expense destination and transfer pricing
In Global procurement scenario if the procurement is for a specific project and task and the destination type is
expense, then you cannot use transfer price for intercompany invoicing. In this scenario, you have only one
option – use purchase price on the PO as the price on the intercompany invoicing.
Scenario 5 – Global Procurement with shop floor destinations and transfer pricing
If the procurement is made with shop floor as destination, then you cannot use transfer pricing for
intercompany invoicing. In this scenario, you have only one option – use purchase price on the PO as the price
on the intercompany invoicing.
CONCLUSION
This paper describes implementation of intercompany invoicing in multi-national organizations. It describes
various scenarios that can be configured in Oracle applications. Since the process as a whole involves many
departments in different operating units, the underlying transactions performed using Oracle applications need
to be carefully planned and managed. The large amount of data that needs to be set up must be carefully
managed as well.
This paper should give sufficient information that you need to begin setting up the intercompany transactions
involving two or more operating units.
ADDITIONAL RESOURCES
• Intercompany Invoicing: How to Set Up and Use this Feature within Oracle Applications, Oracle White
Paper, May 2000.
• Intercompany Invoicing and Advanced Pricing Integration, Oracle White Paper, May 2002.
• Intercompany Transactions, Oracle White Paper, July 2005.
• Oracle Inventory Users Guide, 11.5.10.
• Oracle Order Management Users Guide, 11.5.10.
• Oracle Accounts Receivable Users Guide, 11.5.10.
• Oracle Accounts Payable Users Guide, 11.5.10.
• Oracle Purchasing Users Guide, 11.5.10.
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