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Understanding the Bilateral Netting Process

Bilateral netting is a process by which two parties (supplier and client to each other) reduce or aggregate the overall number of transactions between them. This decreases actual transaction volume between the two parties. It also decreases the amount of accounting activity and associated business costs (for example, banking fees).

This chapter discusses how to configure, define, and process netting transactions. You can:

There are two netting closing methods: partial and full.

Note: PeopleSoft delivers and supports only partial bilateral netting functionality. However, you can adapt the application to handle full bilateral netting functionality (though PeopleSoft will not support this configuration). In addition, when using full bilateral netting functionality, you can also optionally activate the value-added tax (VAT) functionality to calculate VAT transactions.

Here is an example of partial bilateral netting:

Company A is both a client and a supplier of Company B and holds Accounts Payable (AP) and Accounts Receivable (AR) line items in relation to Company B. The two companies set up a contractual netting relationship, modifying their typical accounting, to enter into this protocol. They agree on particular intervals to conduct netting and zero out their respective accounts.

Company A's books contain the following line-item amounts:

AP

AR

100

150

250

50

Total: 350

Total: 200

<200>

 

Net: 150

 

Without netting, Company A would have conducted four transactions to address the two Accounts Payable and two Accounts Receivable line items. Instead, their single outstanding balance to pay off and zero out after processing is 150. Using this example, Company B's books would be a mirror image of Company A's.

This is a simple example, but if there are hundreds or thousands of transactions happening between organizations, there can be a considerable decrease in transactional activity and attendant fees. This graphic illustrates the bilateral netting process.

Image: Overview of the bilateral netting process

Overview of the bilateral netting process

Overview of the bilateral netting process

Discounts Applied to Netted Transactions

You have the option to process accounts payable discount terms and accounts receivable discount terms as they are defined on each side to netted transactions. You can select a Apply Discount to Transactions check box on the Netting Contracts - Primary Information page or the Manual Select Netting - Manual Selection page.

You can set up Manual Select Netting to manually net the accounts payable and accounts receivables transactions, or you can run the Automatic Netting Selection process (TR_NET_ASEL) to net these transactions for any date that occurs on or before the date that you run the pay cycle. The Netting Auto Selection process stores the discount available amounts related to selected accounts payable vouchers and accounts receivable items based on the selection of the Apply Discount to Transactions check box on the Netting Contracts - Primary Information page.

When you run the Netting Close process, TR_NET_CLOSE, the Pay Cycle Manager calls the Application Engine program (TR_NET_DSCNT) to apply the discounts to the netted transactions. This program updates the netted amounts, balance amounts, and discount applied amounts on the netting tables for Netting Reference IDs that have the apply discount option set. The program will then call on accounts payable to provide the amount of discount taken for the selected accounts payable vouchers and will call on accounts receivable to provide the amount of discount taken for the selected accounts receivables items to complete the Netting Close process.

These are some of the factors that you will want to consider when applying discounts to netted transactions.

  1. While applying discounts to netted transactions, all accounts payable vouchers and accounts receivable items associated with a netting reference are evaluated for discount and a discount is applied wherever applicable. The collection of any accounts receivable item balance, whether partial or final, could be impacted by various factors such as the ability to pay by the customer, the amount of liquidity, and more as an event that happens after the process applies the discount to netted transactions and the information stored in the accounts receivable tables is not subject to reconciliation with the information stored in Netting History tables.

  2. The selection of the Apply Discount to Transactions check box is applied to both Accounts Payable vouchers and Accounts Receivable items.

  3. While applying a discount to netted transactions, accounts payable vouchers and accounts receivable items are not re-sequenced.

  4. You cannot partially deselect an accounts payable voucher or an accounts receivable item when you select the Apply Discount Transaction check box.

Here is an example of bilateral netting transactions where discounts have been applied to netting transactions.

Netting Scenario where AR > AP

 

Gross Amount

Netting Amount

Balance Amount

Deselected Amount

Earned Discount

Discount Available

Discount Taken

Adjusted Gross Amount

Netting Status

AP Voucher

1500.00

1500.00

 

 

Y

30.00

 

 

NET

AP Voucher

1000.00

1000.00

 

 

Y

20.00

 

 

NET

AP Voucher

500.00

500.00

 

 

Y

10.00

 

 

NET

 

3000.00

3000.00

 

 

 

60.00

 

 

 

                   

AR Item

1500.00

1500.00

 

 

Y

30.00

 

 

NET

AR Item

2000.00

1500.00

500.00

 

Y

40.00

 

 

SPLIT

AR Item

500.00

 

500.00

 

Y

10.00

 

 

BALANCE

 

4000.00

3000.00

1000.00

 

 

80.00

 

 

 

                   

After Applying Discount

AR>AP

               
 

Gross Amount

Netting Amount

Balance Amount

Deselected

Amount

Earn Discount

Discount Available

Discount Taken

Adjusted Gross Amount

Netting Status

AP Voucher

1500.00

1470.00

 

 

Y

30.00

30.00

1470.00

NET

AP Voucher

1000.00

980.00

 

 

Y

20.00

20.00

980.00

NET

AP Voucher

500.00

490.00

 

 

Y

10.00

10.00

490.00

NET

 

3000.00

2940.00

 

   

60.00

60.00

2940.00

 
                   

AR Item

1500.00

     

Y

30.00

30.00

1470.00

NET

AR Item

2000.00

1470.00

490.00

 

Y

40.00

40.00

1960.00

SPLIT

AR Item

500.00

147000

490.00

 

Y

10.00

10.00

490/—

BALANCE

 

4000.00

2940.00

980.00

   

80.00

80.00

3920.00