Overview of Global Procurement Trade Accounting

Companies often design their legal structure for financial efficiency as well as efficiency in the physical flow of goods through the supply chain. Typically, the most optimal financial movement of goods is different from the most optimal physical movement of goods.

For example, the purchase requisitions from a group of subsidiary companies could be routed through a single international purchasing company who deals with the suppliers. As a result, the legal owners of the purchasing organizations will be different from the legal owners of the receiving organizations. This form of purchasing is known as global procurement.

The following discusses:

• Global procurement trade flows

• Trade agreements and accounting rule sets

• Agreements converted to purchase orders

• Commonly used terms

Global Procurement Trade Flows

This figure illustrates a typical global procurement trade flow, in this case between a US corporation and its China supplier. The US corporation has a central procurement business unit which creates trade agreements and purchase orders on behalf of its subsidiaries.

The China supplier drop ships the goods directly to the US receiving inventory organization M1. However for legal and accounting purposes, the trade flows from the China supplier through the China sold-to legal entity (China Ltd), to the US receiving legal entity (US Inc). For management and profit tracking purposes, the trade flows from the China sold-to profit center business unit CN BU to the US receiving profit center business unit US West.

Financial Trade Agreements and Accounting Rule Sets

A trade agreement defines the parties in the trade relationship. In this example the trade agreement is between the US corporation and the China supplier, and it defines the buying, selling, sold-to, and receiving legal entities, profit center business units, inventory organizations, and trade organizations.

The accounting rule sets define source documents and accounting that is required in the legal and financial flow, also known as the ownership change event flow. A rule set is associated with a financial route, and financial routes can have different accounting rule sets.

The following illustrates a trade agreement setup for the US corporation:

• Agreement #: GP001

• Type: Procurement

• Supplier Ownership Change: ASN (Advance Shipment Notice)

• Primary Trade Relationship #: PTR1

• Sold-to Legal Entity: China Ltd.

• Sold-to Business Unit: CN BU

• Deliver-to Legal Entity: US Inc.

• Deliver-to Business Unit: US West

• Financial Trade Relationship #: FTR1

• From Legal Entity: China Ltd.

• From Business Unit: CN BU

• From Organization: CN INV ORG

• To Legal Entity: US Inc.

• To Business Unit: US West

• To Organization: M1

• Profit Tracking: Yes

• Invoicing: Yes

• Obligation Currency: CNY

• Rate Type: Corporate

• Transfer Pricing: Purchase Order - 10%

• Purchase Order/Sales Order: No

Trade Agreement Converted to Purchase Orders

The trade agreement is used to create purchase orders. The following illustrates a purchase order created under the US Corporation trade agreement # GP001:

• Document Type: Purchase Order

• Document #: PO-GP001

• Document Line #: 1

• Document Line Detail: 1.1

• Document Line Distribution #: 1.1.1

• Item: SFO-CST_ASSET

• Quantity: 100

• UOM: Each

• Currency: CNY

• Price: 650

• Sold-to Legal Entity: China Ltd.

• Trade Organization: CN INV ORG

• Deliver-to Organization: M1

• Primary Trade Relationship #: PTR1

Global Procurement Common Terms

The following table describes the terms commonly used in global procurement trading:

Terms	Definitions and Rules
buy-sell relationship	Relationship between two business units where one acts as a buyer and the other as a seller of goods or services. The seller records the revenue, cost of sale, and receivables. The buyer records the payables and inventory or expense. A buy-sell trade between internal business units is settled through the transfer price.
asset item	Inventory item where the cost of acquisition is valued as an asset on the balance sheet. The inventory cost is expensed when it is consumed or sold.
expense item	Inventory item whose cost of acquisition is booked as an expense.
transfer price	The unit price that one business unit charges another for goods or services traded within the enterprise. The transfer price is typically based on the price list, cost plus or minus, or purchase price plus or minus.
financial route	Designates how financial transactions are settled, can be different from the physical route, and may involve one or more intermediary nodes. The intermediary nodes are internal business units that are not part of the physical supply chain transaction but are part of the financial route.
Incoterms	A series of sales terms in international trade, used to define the rights and obligations of the trade partners with respect to the delivery of goods sold. Incoterms are used to divide transaction costs and responsibilities between buyer and seller, and to reflect transportation practices.
intercompany profit and loss	The internal profit or loss arising out of trade among business units in the enterprise. These internal profits and losses are used for internal management but are typically eliminated when producing the enterprise consolidated financial statements for external stakeholders.
intercompany trade	The trade of goods and services between organizations belonging to different legal entities within a conglomerate.
intracompany trade	The trade of goods or services between two internal organizations within a legal entity.
ownership change event	The transfer of title of goods and services from one party to another. This results in accounting and the creation of financial documents such as Accounts Receivable and Accounts Payable invoices.
price list	Contains the basic list information and pricing attributes for items or product groups.
pricing option	A method to compute the transfer price based on cost, source document price, or price list.
profit center	A business unit that operates with its own income statement and reports to the legal entity.
purchasing trade organization	The inventory organization reporting to the sold-to legal entity identified in the purchase order. This organization is used for cost accounting the transactions in the sold-to legal entity.
qualifiers	Business attributes of a supply chain document or transaction that determine the applicability of the trade agreement.
supply chain financial orchestration agreement	An agreement between the legal entities, business units, and trade organizations of a corporate group. The agreement defines the parties in the trade relationship and the financial settlement process.
trade distributions	Subledger entries created by Oracle Receipt Accounting and Oracle Cost Accounting for Oracle Supply Chain Financial Orchestration trade transactions.
procurement business unit	Has central responsibility for the creation of trade agreements and purchase orders on behalf of legal entities and business units under the holding company.