In the continuation of the previous article of this series linked here, the next step would ideally be to define the Legal Entity.  However, before we do so, let us add the intercompany segment first to our chart of accounts. Before we go ahead and see the steps for adding the intercompany segment, let us first understand the basics of intercompany accounting.

Firstly what is an intercompany segment?

The Intercompany segment allows you to track the internal business activity between different legal entities within the same group company or enterprise.

Give me some examples of intercompany transactions?

In Fusion Payables, you can make a payment from a Legal Entity but using a bank account of another Legal Entity. Let us assume that there is only one payables department in GE company. This is a fictitious example, because we all know how large GE as a company is. Let us call this “GE Common” entity which provides a shared service function, one of which being the payables processing. However GE’s Aviation Entity might have its own bank account. Therefore when an Aviation related invoice is raised by a vendor to “GE Common”, then invoice is processed within the entity “GE Common” but the bank account used belongs to “GE Aviation”. This results in an intercompany transaction because the liability for this invoice should never have been incurred by “GE Common”. Another example could be that a GE Aviation ships some goods to the customer, but uses some of the spare parts from the Warehouse that belongs to “GE Common”.

What is so special about the intercompany segment in Fusion Finanancials ?

As you will see in this article, when you assign a intercompany segment label to the segment in a chart of accounts structure, then it becomes the intercompany segment. A segment with this label means that Oracle Fusion Accounting Hub will populate a value into this segment to identify the other legal entity involved in this intercompany transaction. Therefore this can also be called as a contra entity segment.

What is Intercompany Balancing

Based on the intercompany balancing rules that you configure[I will write about this in due course], the Fusion Financials automatically generates the accounting lines to ensure that credits equal debit for each Legal Entity. This is so, in Fusion Applications, every journal must be balanced by the max 3 balancing segments. But the first balancing segment almost always is the Legal Entity.

In Fusion Applications, we can define a primary balancing segment, optionally second balancing segment and again optionally a third balancing segment.

For example, assume a Journal in Fusion General Ledger.

Debit $10 to GECOMMON.IT.34232.ABC.000

Credit $10 to GEAVIATION.PAY.23032.DEF.000

As you can see above, the journal does not balance for the balancing segment because the total debit does not equal to the total credit for either GECOMMON or GEAVIATION. Therefore the system will generate another two lines in this example do

Debit $10 to GECOMMON.XX.XXXXX.XXX.000

Credit $10 to GECOMMON.XX.XXXXX.XXX.GEAVIATION

Credit $10 to GEAVIATION.XX.XXXXX.XXX.000

Debit $10 to GEAVIATION.XX.XXXXX.XXX.GECOMMON

Now, these lines in green are automatically created by the Fusion Financials to balance the journal for both GECOMMON and for GEAVIATION. This automatic intercompany balancing journal line creation process ensures proper recording of journals across legal entities.

Intercompany balancing rules are defined for pairs of primary balancing segment values, pairs of legal entities, pairs of ledgers or for a chart of accounts structure. Account combinations for intercompany balancing lines are automatically created based on combinations of source, category, and balancing segment values of the line to be balanced.

Will these extra lines not result in double counting Credits and Debits during group consolidation in Fusion General Ledger ?

During consolidation, you can define elimination rules, so that these accounting balances with Intercompany segment are excluded.

Should I use same value set for Entity Segment and Intercompany segment?

If you are using Segment Value security, then it is better to use a different value set. Otherwise in the above example, you will need acess to both GECOMMON and GEAVIATION in the value set security. If the value sets are different for primary balancing and intercompany segments, then you need to ensure the values within them are the same. Note- If you use same value set for both, then you need to manage the security of Entity values using Data Access Sets. This is the recommended approach in Fusion General Ledger, i.e. you are recommended to use the same value set for Entity and Intercompany segment.

When is the balancing line created in Fusion Applications?

The balancing is performed during Fusion General Ledger posting of journals or when Subledger Accounting creates the journals to be transferred to GL.

Is intercompany a pure General Ledger Feature of in Fusion Financials?

Not really. In Fusion Applications, you can create manual intercompany transactions, i.e. a transaction entry using a user interface screen for intercompany transactions or using Fusion Desktop Integrator for Excel upload or using intercompany interface tables. These are unrelated to the auto balancing feature that is described above in example of green lines above.

Manually entered transactions

The manually entered transactions can be across the chart of accounts or across the ledger. When the transactions are processed and approved, then these transactions are either sent to General Ledger or are optionally sent to Receivables and Payables. You can transfer intercompany transactions directly to the general ledger if you do not need intercompany invoices.

Where are the intercompany processing rules configured in Fusion Applications?

In Fusion Applications, you will configure your intercompany balancing rules just at just one place. In Oracle EBS i.e. 11i and R12, you could also define the intercompany processing rules in Oracle Projects Accounting and Oracle Inventory. This made you configure your intercompany rules at various places. But now in Fusion Applications, you have to configure them just at one place centrally.

Any other key benefits over Oracle EBS?

We can also define intercompany rules at Chart Of Account level. It means you can define your intercompany balancing rules without the context of Legal Entity or Ledger. In this case you will define rule at Chart of Accounts level, and it will apply to all Legal Entities and Ledgers.

You define intercompany balancing rules at the following levels.
For example, when system generates the balancing line, you may want the Natural Account Segment value to be different for every Ledger.

Rule Level 1. Primary balancing segment

Rule Level 2. Legal entity

Rule Level 3. Ledger

Rule Level 4. Chart of accounts

The rules at Rule Level 1 get highest priority. For example, if you define a Primary Balancing Segment rule and a Legal Entity level rule. If both rules are applicable for balancing a particular journal, the Primary Balancing Segment rule is used, as it has a higher precedence.

If you want to use a rule against all legal entities and all ledgers, then define the balancing rule at Rule Level 4.

In Fusion Applications, you can also define a transaction types to be used for Manual Intercompany transactions. When you define your intercompany balancing rules, you can specify the transaction type against the rule so that different transaction types can have different intercompany accounting rules.

If I use Intercompany Receivables and Payables feature, how do I decide which vendor & customer is used?

Of course in Oracle Fusion Payables you need a vendor to capture an invoice and likewise in Oracle Fusion Receivables, you need a customer record to enter an invoice. For the purpose of intercompany, you will create a unique customer and supplier for each Legal Entity for which you wish to capture manual intercompany transactions for Payables & Receivables. For this feature, the default/primary Pay To or Bill To site will be used by the intercompany.

What if I do not wish to implement Intercompany Balancing feature?

It is recommended you always have an intercompany balancing segment.

But if you dont then ensure in Ledger Options screen that the checkbox for “Enable Intercompany Accounting” is not checked.

Now the steps to define the intercompany segment are listed below. We will need separate articles for walking you through the configuration of intercompany rules.

First go to Chart Of Accounts structure screen

Click on Edit Structure

Let us define the intercompany segment now

Specify the column name and the value set name, in this case I am reusing the existing value set that we used for Legal Entity Segment.

Also very important, attach the label for Intercompany to this segment

Click on manage structure instances, so that we can define the segment as Required, with Display enabled and enabled for OTBI reporting by checking BI Flag.

Search the structure instance, select the COA instance an click Edit

Ensure it is BI Enabled, so that it is available in OTBI Reports

Click Deploy Flexfields again

Deploy the flexfield

Anil Passi

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