This chapter covers the following topics:
When transactions occur between two related legal entities in an intercompany organization or between two groups in the same legal entity, the resulting balances from these transactions must be eliminated or appropriately adjusted during the preparation of the organization’s consolidated financial statements. Failure to properly eliminate these intercompany transactions can result in erroneous and overstated financial results including activities between related parties and can lead to legal repercussions.
To efficiently identify and eliminate intercompany transactions at the close of an accounting period, most organizations use specific accounts to book these transactions. This facilitates the consolidation process by segregating all intercompany accounting into specific accounts. You should define intercompany accounts as part of the chart of accounts setup process. Identifying these accounts allows your organization to book transactions identified as intercompany transactions into the special accounts. You should also define any accounts you want to use for intracompany balancing during implementation.
There are two types of solutions to address intercompany and intracompany accounting needs:
Intercompany accounting for transactions performed between separate legal entities that belong to the same corporate enterprise.
Intracompany balancing for journals that involve different groups within the same legal entity, represented by balancing segment values. A group could be a profit center, manufacturing plant, a warehouse, a cost center, or any other organization that represents a subset of a legal entity. Often, these transactions pass through a clearing organization, which is also represented by a balancing segment value.
Before setting up intercompany accounts and intracompany balancing rules, you must complete the following setup steps:
Set up General Ledger
Set up legal entities
Note: Creating Accounting Setups, Oracle Financials Implementation Guide
Intercompany setup includes these steps:
In Accounting Setup Manager, select Enable Intracompany Balancing in the Update Ledger: Ledger Options page to balance intracompany journals automatically.
Note: You must complete the accounting setup in General Ledger before setting up Intercompany. The assigned legal entities and balancing segment values will not be visible in the Intercompany Setup pages unless the Accounting Setup status is Complete.
Set up Intercompany
Note: Do not qualify the same segment as for your chart of accounts. This will prevent the Balancing API from correctly generating the intercompany segment value.
Intercompany journals involve balancing segment values that map to different legal entities. These journals are balanced for each legal entity by using their intercompany accounts. The Balancing API uses the intercompany accounts defined for the relevant effective date range. Since multiple accounts may be defined for the same date range, the Balancing API picks the accounts flagged with the Use for Balancing indicator. The offsetting debit for a legal entity goes into its intercompany receivables account. The offsetting credit goes into the legal entity’s intercompany payables account.
Intercompany accounts may be defined at the legal entity level. That is, each transacting legal entity has different intercompany accounts defined for different trading partner legal entities, regardless of which specific balancing segment values of those legal entities are used in the journals. The transacting and trading partner balancing segment values are then not explicitly specified in the definition and are set to All.
Intercompany accounts may be defined at the balancing segment level of the legal entities. In other words, a transacting legal entity can use different accounts for different transacting balancing segment values, depending on what the trading partner legal entity and trading partner balancing segment value are. In that case, transacting or trading partner balancing segment values may be explicitly specified in the intercompany account definitions.
There are different types of intercompany journals. The Balancing API first determines the type of the intercompany journal (one-to-one, one-to-many, many-to-one, or many-to-many) with respect to the legal entities. For intercompany balancing there is no clearing company usage and all legal entities are balanced by summary net with respect to each other.
The following examples consider a one to one journal and how they are balanced.
Intercompany Balancing Example
Balancing segment value 10 maps to legal entity 1 (LE 1). Balancing segment value 20 maps to legal entity 2. The chart of accounts for this example has three segments: balancing, natural account, and Intercompany.
Legal entity 1 uses the corporate ledger and the corporate chart of accounts.
| Trading Partner Legal Entity | Account | Type |
|---|---|---|
| LE 2 | 10-2000-20 | Intercompany Payables |
Legal entity 2 uses the corporate ledger and the corporate chart of accounts.
| Trading Partner Legal Entity | Account | Type |
|---|---|---|
| LE 1 | 20-4000-10 | Intercompany Receivables |
The Balancing API must balance the following journal:
| Journal Line | Account | Debit | Credit |
|---|---|---|---|
| 1 | 10-5200-00 | 1800.00 | |
| 2 | 20-5000-00 | 1800.00 |
The API determines that 10 and 20 belong to different legal entities. Because this journal has one debit legal entity (10) and one credit legal entity (20), it is a 1-1 journal. The API begins with the debit legal entity. The balanced journal is:
| Journal Line | Account | Debit | Credit | Comments |
|---|---|---|---|---|
| 1 | 10-5200-00 | 1800.00 | Original line | |
| 2 | 20-5000-00 | 1800.00 | Original line | |
| 3 | 10-2000-20 | 1800.00 | Intercompany Payables to legal entity 2 (balancing segment value 20) | |
| 4 | 20-4000-10 | 1800.00 | Intercompany Receivables from legal entity 1 (balancing segment value 10) |
Intercompany accounts are defined to provide automated accounting between legal entities within the same company.
Important: Defining intercompany Receivables and Payables accounts is required before using the intercompany feature.
Before defining intercompany accounts, you need to choose a transacting legal entity (From legal entity) and a trading partner legal entity (To legal entity).
Intracompany balancing rules are used to create balancing lines on journals between balancing segment values either within the same legal entity, or where there is no legal entity context.
Intracompany balancing rules are used when more than one balancing segment value exists on a transaction or journal entry, as long as you have selected the Balance Intracompany Journals option for the ledger. You cannot post a journal in General Ledger when the debit and credit amounts for each balancing segment value do not net to zero. These journals can be balanced automatically if you set up balancing rules and enable the option to balance cross-entity journals.
You must define Intracompany balancing rules if you want to balance journals automatically. You may define as many or as few balancing rules as you choose, and each balancing rule may have one or many accounting rules. Because balancing is an automated process, there should be at least one balancing rule with at least one accounting rule to proceed. This default balancing rule should be defined for the journal source Other and journal category Other for the ledger and legal entity you want to balance. The default accounting rule on each balancing rule is defined for the debit balancing segment value All Other and credit balancing segment value All Other.
With intracompany accounting, you can define both a debit (due from) and credit (due to) balancing segment, which gives you more control over each balancing relationship. You can specify different debit and credit accounts for each different intracompany trading partner, which is represented by a specific balancing segment value.
All Other is also available as a balancing segment value if you want the balancing segment value to use the same due to/due from accounts for every intracompany trading relationship that has not been specifically defined.
If you set up a specific debit and credit balancing segment value, then the assigned debit and credit account combinations are used. If you use All Other, the appropriate trading partner balancing segment value replaces the balancing segment value of the account combination.
You can also determine the level the Balancing API should use when selecting either Summary Net or Detail.
For balancing many-to-many journals there are several balancing segment values with net debits and net credits on a transaction and it is not possible to determine which balancing segment value is trading with which balancing segment value. You can decide whether to use a clearing balancing segment value or a default rule to handle these transactions.
Intracompany Balancing Example
The chart of accounts for this example has three segments: balancing, natural account, and intercompany.
Intracompany Balancing Rule:
| DR Balancing Segment Value | CR Balancing Segment Value | Debit Account | Credit Account |
|---|---|---|---|
| 01 | 02 | 01-4102-02 | 02-2201-01 |
| 02 | 01 | 02-4201-01 | 01-2102-02 |
| 01 | All Other | 01-4100-99 | 99-2200-01 |
| All Other | 01 | 99-4200-01 | 01-2100-99 |
| All Other | All Other | 99-4000-99 | 99-2000-99 |
Journal 1:
| Balancing Segment Value | Debit | Credit | Line |
|---|---|---|---|
| 13 | 100.00 | Original Line | |
| 03 | 100.00 | Original Line |
A specific rule is not defined for the balancing segment values 13 and 03. The API will use the All Other – All Other rule to create the following balancing lines. The result of the balancing will be:
| Account | Debit | Credit | Line |
|---|---|---|---|
| 03-4000-13 | 100.00 | Debit Balancing Line | |
| 13-2000-03 | 100.00 | Credit Balancing Line |
Journal 2:
| Balancing Segment Value | Debit | Credit | Line |
|---|---|---|---|
| 01 | 100.00 | Debit Balancing Line | |
| 02 | 100.00 | Credit Balancing Line |
Since a specific rule is defined for the balancing segment value 02 in a debit position and balancing segment value 01 in a credit position, the API will use the 02 – 01 rule to create the following lines. The result of the balancing will be:
| Account | Debit | Credit | Line |
|---|---|---|---|
| 02-4201-01 | 100.00 | Debit Balancing Line | |
| 01-2102-02 | 100.00 | Credit Balancing Line |
Note: Create Intracompany Balancing Rules Page, Oracle Advanced Global Intercompany System User's Guide
The Balancing API is used by Oracle General Ledger and Oracle Subledger Accounting to provide the necessary balancing lines for a given combination of balancing segment values. The API processes both intracompany lines (between balancing segment values in the same legal entity) and intercompany lines (between balancing segment values belonging to different legal entities) according to the setup defined in the Intracompany Balancing Rules pages and in the Intercompany Accounts pages. If there are both intercompany and intracompany lines in the same transaction, the Balancing API performs intercompany balancing across legal entities, and then intracompany balancing across balancing segment values within each legal entity. Previously, these balancing lines were not determined until posting to General Ledger.
The Balancing API is used by General Ledger and Oracle Subledger Accounting to build journal lines automatically based on balancing rules that you have defined in the Intracompany Balancing Rules page. The Balancing API is called by General Ledger prior to posting and by Subledger Accounting at the time of subledger journal creation.
The following table provides an explanation of different types of accounting setups.
| Entity | Accounting Setup A | Accounting Setup B | Accounting Setup C | Accounting Setup D |
|---|---|---|---|---|
| Legal Entity 1 | BSV 01,11 | No BSVs assigned | BSV 01,11 | No BSVs assigned |
| Legal Entity 2 | BSV 02,22 | No BSVs assigned | BSV 02,22 | No BSVs assigned |
| Ledger | BSV 03,33 | BSVs 01, 02, 03 | No BSVs assigned | No BSVs assigned |
The following table indicates how the different combinations of balancing segment values use the intercompany or intracompany balancing.
| Setup Type | Transactions between: | Balancing |
|---|---|---|
| Accounting Setup A | Balancing segment value 01 and 11 | Intracompany |
| Balancing segment value 02 and 22 | Intracompany | |
| Balancing segment value 01 and 22; or balancing segment value 01 and 02; or balancing segment value 02 and 11; or balancing segment value 22 and 11 | Intercompany | |
| Balancing segment value 01 and 03; or balancing segment value 02 and 33 | Balancing will fail because balancing segment value 01 is assigned to a legal entity and 03 is assigned to a ledger. | |
| Accounting Setup B | Balancing segment value 01 and 03; or balancing segment value 01 and 02 | Intracompany |
| Accounting Setup C | Balancing segment value 01 and 11 | Intracompany |
| Balancing segment value 02 and 22 | Intracompany | |
| Balancing segment value 01 and 22; or balancing segment value 01 and 02; or balancing segment value 02 and 11; or balancing segment value 22 and 11 | Intercompany | |
| Accounting Setup D | Transactions between any balancing segment values | Intracompany |
Because balancing is an automated process, there must be a valid rule with at least one accounting rule to proceed. The default rule is the rule defined for the source Other and the category Other (Other-Other). This rule is not required, but it is recommended that you define a rule for Other-Other to catch any undefined journal sources and/or categories.
Note: Intracompany Balancing Rules
Intracompany balancing allows you to define rules according to the business needs of your company. When there are many balancing rules defined, the Balancing API uses an evaluation order to pick the appropriate rule. Once the balancing rule is selected, there may also be several accounting rules that must be evaluated on the balancing rule. The Balancing API uses the same order for evaluating accounting rules, and understanding this evaluation order will help you define your balancing rules and accounting rules.
Explicitly defined rules are checked first, and they take precedence over all other rules. Assume a journal with a source Assets and category Adjustment, requiring debit balancing for Company 01 and credit balancing for Company 02.
For balancing rules, this means a specific combination of journal source and journal category exists for the ledger and legal entity. For example, a balancing rule for the journal source Assets and the journal category Adjustment.
For accounting rules, this means a specific combination of debit balancing segment value and credit balancing segment value. For example, debit balancing value 01 and credit balancing segment value 02.
If the Balancing API finds no explicit match, then it next searches for an explicitly defined rule combined with a default value.
For balancing rules, this means a combination of a specific journal source and the default journal category for the ledger and legal entity. For example, a balancing rule for the journal source Assets and the journal category Other.
For accounting rules, this means a combination of a specific debit balancing segment value and the default credit balancing segment value. For example, debit balancing value 01 and credit balancing segment value All Other.
If the Balancing API finds no match, then it searches for a rule with a default value combined with an explicitly defined value.
For balancing rules, this means a combination of the default journal source and a specific journal category for the ledger and legal entity. For example, a balancing rule for the journal source Other and the journal category Adjustment.
For accounting rules, this means a combination of the default debit balancing segment value and a specific credit balancing segment value. For example, debit balancing value All Other and credit balancing segment value 02.
Finally, if the Balancing API finds no match after checking for all three previous steps, then the default value should be used.
For balancing rules, this means a combination of the default journal source and the default journal category for the ledger and legal entity. For example, a balancing rule for the journal source Other and the journal category Other.
For accounting rules, this means a combination of the default debit balancing segment value and the default credit balancing segment value. For example, debit balancing value All Other and credit balancing segment value All Other.
Note: For more information about using the Advanced Global Intercompany System, see: Introduction, Oracle Advanced Global Intercompany System User's Guide.