Model Legal Entities
Oracle Fusion Cloud Applications support the modeling of your legal entities. If you make purchases from or sell to other legal entities, define these other legal entities in your customer and supplier registers.
These registers are part of the Oracle Trading Community Architecture.
When your legal entities are trading with each other, represent them as legal entities and as customers and suppliers in your customer and supplier registers. Use legal entity relationships to determine which transactions are intercompany and require intercompany accounting. Your legal entities can be identified as legal employers and therefore, are available for use in Human Capital Management (HCM) applications.
Several decisions you should consider when you create legal entities.
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The importance of using legal entity on transactions
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Legal entity and its relationship to business units
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Legal entity and its relationship to divisions
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Legal entity and its relationship to ledgers
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Legal entity and its relationship to balancing segments
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Legal entity and its relationship to consolidation rules
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Legal entity and its relationship to intercompany transactions
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Legal entity and its relationship to worker assignments and legal employer
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Legal entity and payroll reporting
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Legal reporting units
The Importance of Using Legal Entities on Transactions
All of the assets of the enterprise are owned by individual legal entities. Oracle Fusion Cloud Financials allow your users to enter legal entities on transactions that represent a movement in value or obligation.
For example, a sales order creates an obligation on the legal entity that books the order and promises to deliver the goods on the acknowledged date. The creation also creates an obligation on the purchaser to receive and pay for those goods. Contract law in most countries contains statutes that state damages can be sought for both:
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Actual losses, putting the injured party in the same state as if they had not entered into the contract.
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What is called loss of bargain, or the profit that would have made on a transaction.
In another example, if you revalued your inventory in a warehouse to account for raw material price increases, the revaluation and revaluation reserves must be reflected in your legal entity's accounts. In Oracle Fusion Cloud Applications, your inventory within an inventory organization is managed by a single business unit and belongs to one legal entity.
Legal Entity and Its Relationship to Business Units
A business unit can process transactions on behalf of many legal entities. Frequently, a business unit is part of a single legal entity. In most cases, the legal entity is explicit on your transactions. For example, a payables invoice has an explicit legal entity field. Your accounts payables department can process supplier invoices on behalf of one or many business units.
In some cases, your legal entity is inferred from your business unit that's processing the transaction. For example, Business Unit ACM UK has a default legal entity of InFusion UK Ltd. When a purchase order is placed in ACM UK, the legal entity InFusion UK Ltd is legally obligated to the supplier. Oracle Procurement, Oracle Fusion Cloud Project Management, and Oracle Fusion Cloud Supply Chain and Manufacturing applications rely on deriving the legal entity information from the business unit.
Legal Entity and Its Relationship to Divisions
The division is an area of management responsibility that can correspond to a collection of legal entities. If wanted, you can aggregate the results for your divisions by legal entity or by combining parts of other legal entities. Define date-effective hierarchies for your cost center or legal entity segment in your chart of accounts to facilitate the aggregation and reporting by division. Divisions and legal entities are independent concepts.
Legal Entity and Its Relationship to Ledgers
One of your major responsibilities is to file financial statements for your legal entities. Map legal entities to specific ledgers using the Oracle General Ledger Accounting Configuration Manager. Within a ledger, you can optionally map a legal entity to one or more balancing segment values.
Legal Entity and Its Relationship to Balancing Segments
General Ledger supports up to three balancing segments. Best practices recommend one segment represents your legal entity to ease your requirement to account for your operations to regulatory agencies, tax authorities, and investors. Accounting for your operations means you must produce a balanced trial balance sheet by legal entity. If you account for many legal entities in a single ledger, you must:
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Identify the legal entities within the ledger.
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Balance transactions that cross legal entity boundaries through intercompany transactions.
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Decide which balancing segments correspond to each legal entity and assign them in General Ledger Accounting Configuration Manager. Once you assign one balancing segment value in a ledger, then all your balancing segment values must be assigned. This recommended best practice facilitates reporting on assets, liabilities, and income by legal entity.
Represent your legal entities by at least one balancing segment value. You may represent it by two or three balancing segment values if more granular reporting is required. For example, if your legal entity operates in multiple jurisdictions in Europe, you might define balancing segment values and map them to legal reporting units. You can represent a legal entity with more than one balancing segment value. Do not use a single balancing segment value to represent more than one legal entity.
In General Ledger, there are three balancing segments. You can use separate balancing segments to represent your divisions or strategic business units to enable management reporting at the balance sheet level for each. This solution is used to empower your business unit and divisional managers to track and assume responsibility for their asset utilization or return on investment. Using multiple balancing segments is also useful when you know at the time of implementation that you're disposing of a part of a legal entity and want to isolate the assets and liabilities for that entity.
Implementing multiple balancing segments requires every journal entry that isn't balanced by division or business unit, to generate balancing lines. You can't change to multiple balancing segments after you begin using the ledger because your historical data isn't balanced by the new balancing segments. Restating historical data must be done at that point.
If your enterprise regularly spins off businesses or holds managers accountable for utilization of assets, identify the business with a balancing segment value. If you account for each legal entity in a separate ledger, no requirement exists to identify the legal entity with a balancing segment value.
While transactions that cross balancing segments don't necessarily cross legal entity boundaries, all transactions that cross legal entity boundaries must cross balancing segments. If you make an acquisition or are preparing to dispose of a portion of your enterprise, you may want to account for that part of the enterprise in its own balancing segment even if the portion isn't a separate legal entity. If you don't map legal entities sharing the same ledger to balancing segments, you can't distinguish them using intercompany functionality or track individual equity.
Legal Entity and Its Relationship to Consolidation Rules
In Oracle Fusion Applications you can map legal entities to balancing segments and then define consolidation rules using your balancing segments. You are creating a relationship between the definition of your legal entities and their role in your consolidation.
Legal Entity and Its Relationship to Intercompany Transactions
Use Oracle Intercompany features to create intercompany entries automatically across your balancing segments. Intercompany processing updates legal ownership within the enterprise's groups of legal entities. Invoices or journals are created as needed. To limit the number of trading pairs for your enterprise, set up intercompany organizations and assign then to your authorized legal entities. Define processing options and intercompany accounts to use when creating intercompany transactions and to assist in consolidation elimination entries. These accounts are derived and automatically entered on your intercompany transactions based on legal entities assigned to your intercompany organizations.
Intracompany trading, in which legal ownership isn't changed but other organizational responsibilities are, is also supported. For example, you can track assets and liabilities that move between your departments within your legal entities by creating departmental level intercompany organizations.
Legal Entity and Its Relationship to Worker Assignments and Legal Employer
Legal entities that employ people are called legal employers in the Legal Entity Configurator. You must enter legal employers on worker assignments in Oracle Fusion Cloud HCM.
Legal Entity and Payroll Reporting
Your legal entities are required to pay payroll tax and social insurance such as social security on your payroll. In Oracle Fusion Applications, you can register payroll statutory units to pay and report on payroll tax and social insurance for your legal entities. As the legal employer, you might be required to pay payroll tax, not only at the national level, but also at the local level. You meet this obligation by establishing your legal entity as a place of work within the jurisdiction of a local authority. Set up legal reporting units to represent the part of your enterprise with a specific legal reporting obligation. You can also mark these legal reporting units as tax reporting units, if the legal entity must pay taxes as a result of establishing a place of business within the jurisdiction.