Intercompany Invoicing.......................................................................................................

2
The Intercompany Transaction Flow:..............................................................................2
Intercompany Transaction Flow..........................................................................................4
Transfer Price...................................................................................................................5
Freight..............................................................................................................................5
Tax...................................................................................................................................6
Currency..........................................................................................................................6
Internal Drop shipment (Central Distribution)....................................................................7

Intercompany Invoicing
Intercompany invoicing is done when one organization offers products / services to
another operating unit. For example, when a customer order is processed through the
order cycle and then invoiced, the selling organization records journal entries to accounts
receivable, revenue, and as applicable tax and freight. The shipping warehouse records
journal entries to its inventory asset and cost of goods sold accounts. When this scenario
involves a selling organization in one business unit but a shipping warehouse in a
different business unit, additional accounting must take place. The shipping organization
needs to bill the selling organization at transfer price, and the selling organization needs
to make the corresponding payment.
Note that intercompany invoicing is possible only between two operating units. You
cannot invoice between two inventory orgs if they belong to the same operating unit.
The intercompany AR invoice is the transaction used by Oracle to record intercompany
receivable accounting for the shipping organization: debiting intercompany AR (at
transfer price), tax, and freight and crediting intercompany revenue.
The intercompany AP invoice is the transaction used by Oracle to record the payable
accounting for the selling organization: debiting intercompany COGS (at transfer price)
and freight and crediting the intercompany payable account. Ideally, these transactions
should happen automatically and as soon as possible after the shipment takes place. This
can be done using the intercompany invoicing process within Oracle applications.
Oracle supports intercompany invoicing when:
Shipping operating unit is different from selling operating unit and
Receiving operating unit is different from procuring operating unit.
For a single process flow (one procure-to-pay cycle or order-to-cash cycle), you can
model Oracle to generate intercompany invoices between two or more operating units.
The building block of intercompany invoicing is the setup of intercompany transaction
flow.

The Intercompany Transaction Flow:

The 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.

By enabling advanced accounting for an intercompany transaction flow, you would be

able to generate multiple intercompany invoices between different operating units for the
same physical movement of goods.
Oracle supports intercompany invoicing for both shipping and procuring flows. However,
you need to use the Advanced Accounting option for enabling intercompany invoicing
for procuring flow even if it involves only two operating units. If you do not enable
Advanced Accounting option at the intercompany transaction header, then no logical
transactions will be generated and no intermediate nodes can be defined.
You need to define intercompany relations between each pair of operating units in the
intercompany transaction flow. When advanced accounting is enabled for an
intercompany transaction flow, you will be able to define multiple intercompany
relationships between different operating units. If advanced accounting is set to No, then
an intercompany transaction flow can have only one intercompany relation (it is between
start operating unit and end 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.
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.
Logical transactions are useful to record financial transactions between two operating
units without physical movement of goods. To facilitate accounting in the intermediate
OUs, logical intercompany receipt and issue transactions are created. Similarly, logical
receipt and logical sales order issue transactions are created for those receipts and issues
that are not accompanied with physical receipt and issue of goods.
Advanced Accounting option is not available for internal requisitions internal sales
order business flow. Though you can set the Advanced Accounting flag at Intercompany
Transaction Flow header to Yes, system ignores the flag and does not generate any
logical transactions. This means you cannot have an intermediate financial node in the
intercompany transaction flow. Also, you cannot have intercompany invoicing for
internal sales order with direct transfer (in shipping network between the inventory
organizations) as an option. You have an flexibility to switch off intercompany invoicing
for internal sales orders by setting the profile INV: Intercompany Invoice for Internal
Orders to No.
Intercompany invoicing is possible for inter-org transfers of type In-transit only through
Internal sales Orders. No intercompany invoicing is possible if you perform org
transfers between two inventory orgs belonging two different operating units without
internal sales Orders. Also note that intercompany invoice cannot be raised for inter-org
transfers of type Direct Transfer through Internal sales Orders.

Intercompany Transaction Flow

Intercompany transaction flow with advanced accounting describes the financial
accounting flow between start operating unit and end operating unit through a series of
intermediate operating units. However, all the costing transactions are carried out at
inventory organization. This section describes the role of inventory organizations in
inventory transaction flow with advanced accounting.
Intercompany transaction flow is created between two operating units (called as start
Operating unit and End Operating Unit). For shipping flow, you can create as many
number of transaction flows as there are inventory organizations in start operating unit
(shipping operating unit) and for procuring flow, you can create as many number of
transaction flows as there are inventory organizations in end operating unit (receiving
operating unit). Similarly, you can create intercompany transaction flows for specific
item categories. All logical transactions in intermediate operating units and start / end
operating unit will be logged in the inventory organization specified in each
intercompany relationship.
Inventory Organization in intermediate and end operating unit are used for logging
logical transactions based on which costing will be done. Similarly, you have to run your
intercompany AR and AP programs in those operating units. More often you will find that
intermediate operating units do not have any physical warehouses. However, you have to
create inventory organizations though no physical entities exist, for recording logical
transactions and for running your intercompany AR and AP programs.
In Oracle, Intercompany Transaction Flow as a header and the intercompany relationship
between each pair of nodes is modeled as intercompany relationship lines. Following are
the attributes of the header:
1. Start Operating Unit
2. End Operating Unit
3. Flow Type Shipping / Procuring
4. Ship From (for Shipping flows) and Ship To (Procuring Flows)
5. Category (Purchasing category for purchasing flows and Inventory category for
shipping flows)
6. Item Pricing Options for Asset Items (PO/Transfer price available for procuring flows
only)
7. Item Pricing Options for Expense Items (PO/Transfer price available for procuring
flows only)
8. Start date and End Date for the Transaction flow
9. Advanced Accounting flag (Set to Yes for creating logical transactions and defining
intermediate nodes). This flag should be set to Yes for all Procuring Flows.
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
d. AR Transaction Type
e. Intercompany COGS Account
f. Currency Code (Currency code of the order/ Currency Code of the From Operating unit
/ Currency Code of the End Operating Unit).
3. For AP Invoicing:
a. Supplier
b. Supplier site
c. Freight Account
d. Inventory Accrual Account
e. Expense Accrual Account

Transfer Price
Transfer Price is the price at which an item is transferred from one operating unit to
another operating unit. Transfer price is also usually called as Arms length Price and is
generally guided by the originating countrys accounting standards.
Logic for transfer price determination for shipping flows is explained in Figure .
However, for procuring flow, you can specify whether the transfer price is same as the
PO price in intercompany transaction flow. This means that an operating unit sells at the
same price at which it procured the item to another operating unit. If you specify that the
transfer price is not same as the PO price in the intercompany transaction flow, then
system uses the same logic as depicted in . For procuring flow, you specify the pricing
option (transfer price or PO price) separately for asset and expense items.

Freight
Freight charges can be added to the intercompany invoice. 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 item on
the intercompany invoice and the item to be mentioned on the invoice line is determined
from the profile Tax: Invoice Item as Freight.

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. 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 userdefined 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.

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.

Internal Drop shipment (Central Distribution)

Most multi-national companies have highly focused companies in their network of
company, with each company specializing in their area of operations. Often you will find
that sales organization is different from the distribution organization. In these cases,
goods are only financially transferred from manufacturing company to the sales company
without goods physically passing through sales organization. This kind of business model
allows each organization to concentrate on their core operations and a separate P&L
statement can be made for the organization. Central distribution organization concentrates
on the increasing efficiencies in the logistics by optimizing the route, negotiating with
carriers, planning the deliveries, minimizing stock outs etc.,
We will discuss Internal Drop Shipment of asset items in detail:
For example, Internal requistion is raised in Vision Test (T1) and Sales Order is booked in
Vision Operations (V1). Vision Operations (V1) ships the goods to customer. V1 invoices
Vision Test (T1) at transfer price. V1 raises a sales invoice and sends it to the customer.
T1 raised the Payables invoice against V1

INTERCOMPANY INVOICING
Intercompany Transactions Flow Setup:

Shipping Network for Transaction between V1 to T1

Shipping Network Accounts:

Supplier Definition in T1:

Customer Definition in V1:

Ship To Details:

Bill To Details:

Price List:

Item Cost for Item 7007 in T1:

Item Cost in V1:

Create Internal Requisition and approve the same in T1 Organization:

Run Create Internal Orders in T1 Organization:

Run Order Import in V1 Organization to create Sale Order:

Order MgtImport OrdersOrder Import Request

Query the Sales Order in the Order Organizer form:

Sales Order in V1:

Shipping Transaction/Pick Release in V1:

Query the Order # in the shipping transaction form:
ShippingTransactions

After Pick release, ship the transaction:

Create the Deliver:

Actions Autocreate Deliveries

Ship Confirm the Transaction:

Line is now in Shipped Status:

Ensure that the transaction is costed:

InventoryTransactionsMaterialTransactions, Go to Reason Tab

Run the Intercompany AR Invoice program from V1 Responsibility:

InventoryReportsIntercompany Invoicing

The Create Intercompany Invoice program checks for the Sales Order Issue Transaction
ID of the concerned Sales Order for dumping data into the
RA_INTERFACE_LINES_ALL Table:

Few usefule columns that you can check in RA_INTERFACE_LINES_ALL table after
the above Intercompany program is successfully run:

The unit-selling price is taken from the Price List:

Run the Autoinvoice from the Receivables Responsibility for V1 Organization:

Check the Transaction that is created in the Receivables Responsibility in V1 Org:

Receive the Goods in T1 Organization:

Log file of the Intercompany AP Invoice:

Run the Expense Report Import from the T1 Payables responsibility:

Payables RespOtherRequestsRun

Out of Expense Report Import Report:

Check the Payables Invoice that gets created in the T1 payables:

Inventory Accounting seen in V1:

Inventory Accounting seen in T1 Org: