OAUG Intercompany

THE OFFICIAL PUBLICATION OF THE ORACLE APPLICATIONS USERS GROUP FALL 2012

Intercompany and Intracompany

in Oracle EBS R12: A Deep Dive

The Oracle EBS Patch Wizard

Helps Users Determine

the Impact of Patches

Las Vegas Expands its Oracle

Business Intelligence Horizons

In E-Business Suite (EBS) Release 12, Oracle

completely changed the way in which intercompany

transactions can be accounted by creating a robust,

flexible, rules-based intercompany accounting program.

This accounting program, however, is only useful

if you understand how it’s used and how it should

be configured. This article will give clarity to those

configurations, EBS Legal Entities, the purpose they

serve and answer the question: “When is a legal entity,

not a legal entity?”

A legal entity must be registered with a jurisdiction,

which can be a state or province in the United States and

Canada, or a country. Wherever the legal entity is located,

there will be certain statutory requirements within a

jurisdiction that should be supported from a business

and systems management perspective. Legal entities may

represent a single component of your company or several

components unified via a single business purpose.1

O A U G F E A T U R E16

oaug feature

Thomas J. Simkiss, Jr., JD, CPA

& Lee Briggs, BizTech

1 Oracle Financials Concepts Guide, August 2010, p. 2 – 4

This article appeared in the fall 2012 issue

of OAUG Insight magazine, the official

publication of the Oracle Applications Users Group

(OAUG), and is reprinted with permission.

In Oracle EBS 11i, legal entities were required as

part of the human resources (HR) configuration and

were required to be associated with a set of books. The

purpose they served within the applications was not

always clear. In EBS R12, a new legal entity structure has

been introduced to track intercompany transactions at a

very detailed level.

ORACLE LEGAL ENTITIES

A company’s HR information and structure is

owned by the Government Reporting Legal Entity

(GRLE), which represents the formal employer in the

human capital management system (HCM). Employees

must belong to a specific GRLE within the employer’s

EBS R12 system. A GRLE can represent a registered

company or other registered legal entity. GRLEs are a

particular type of system legal entity and serve to connect

employees with the appropriate company or other entity

in the legal world.

LEGAL ENTITY

The legal entity defined in the EBS R12 should

correspond to the “legal entity” or “company” in which

transactions are recorded or required in day-to-day

business operations. Information about a

registered company or some other entity may

be stored in the “legal entity;” information

may include the registered address and

director or officer names. The legal entity

administers transaction-level rules in

compliance with national laws.

SYSTEM LEGAL ENTITY

The system legal entity within EBS

R12 is the first party on business transactions and is the

transaction tax filer and payer. Oracle recognizes that

for many groups, particularly in environments where the

authorities allow companies to treat many legal entities

as one, companies may not need or want to segment

data or account separately for each entity that they have

incorporated. Therefore, the system legal entity does not

automatically account for itself.

Oracle facilitates correlation of subledger activity

in reporting legal structures by exploiting related system

entities for operating units, ledgers and company

representation in the chart of accounts:

● Account for legal entities separately if needed.

● Account for a group of legal entities as if they

were one.

● Account for a part of a real-world legal entity as if

it were completely standalone when appropriate. 2

INTERCOMPANY AND INTRACOMPANY

ACCOUNTING

In EBS R12, balancing segments can be assigned to

legal entities to allow for transaction entry identification

and reporting. While Oracle General Ledger (GL) can

be configured without using legal entities (balancing

segments do not have to be associated with legal entity),

if a company plans on using Receivables or Payables, a

legal entity is required. The main purpose of the legal

entity in Payables and Receivables is to serve as the

custodian of banking relationships. Using the Legal

Entity Configurator and Oracle Security Wizard, legal

entities must be assigned to a particular responsibility

in order to allow it to have access to configure bank

information and associate them with legal entities.

In EBS R12, transactions between balancing

segments can be defined as either intercompany or

intracompany (See Figure 1). 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 application programming interface (API)

uses the intercompany accounts defined for the relevant

effective date range. Since multiple accounts may be

17

oaug insight ● fall 2012

oaug.org

Intracompany

Intercompany

Transactions between two or more balancing segments

within a single legal entity. Intracompany accounts are

defined for each balancing segment value.

Transactions between two or more legal entities.

Accounts are defined at the legal entity level.

2 IBID. pg. 2 – 7

Figure 1

defined for the same date range, the balancing API

picks the accounts flagged with the Use for Balancing

indicator. The offsetting debit to a legal entity goes into

its intercompany receivables account. The offsetting

credit goes into the legal entity’s intercompany payables

account.

INTERCOMPANY ACCOUNTS

Intercompany accounts may be defined at the

legal entity level. That is, each transacting legal entity

may have 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 can also be set

to “All Other,” and not individually specified for each

combination.

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. 3

INTRACOMPANY BALANCING

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 the general

ledger when the debit and credit amounts for each

balancing segment value do not net to zero.

You must define intracompany balancing rules if

you want to balance journals automatically. The 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 journal entries, 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 such transactions.4

NOTE: If you use cash management and the

automated sweep feature, R12 uses the intracompany

account as a CLEARING account to sweep across

legal entities. So even if you are not using intracompany

accounting, this setup may be required.

REALTY CO

Realty Co manages approximately 1,200 entities

in the United States, Canada and Mexico. Each

separate property is a distinct legal entity with its own

required reports (both internal and external) tax filing

requirements, and local and regional reporting and

analysis. Realty Co implemented Oracle EBS Financials

Release 12.1.3 to manage the back office functions for all

the entities. Modules utilized include General Ledger,

Payables, Assets, Receivables, Cash Management and

E-Business Tax. The chart of accounts was configured

with six segments: Company (Balancing Segment), Cost

O A U G F E A T U R E18

3 Oracle Financials Implementation Guide, August 2010, pg. 5 – 2, 3 4 IBID, pg. 5 – 5

Center, Natural Account, Intercompany and two future

use segments.

The main business issue to be addressed was how to

account for all of the different intercompany transactions.

The requirement was to allow each of 1,200 entities to

transact with one another as required. However, Realty

Co wanted to use clearing companies as the intermediary

channel for running most of the transactions, thus not

having to track potentially thousands of intercompany

balances and transactions.

THE BUSINESS REQUIREMENT

For the approximately 1,200 entities managed by

Realty Co, Payables and Receivables invoices can be

charged to any single or multiple entities. In addition,

Assets can be assigned to any legal entity, and journal

entries can be made between any legal entities.

Realty Co has 17 disbursement bank accounts.

Each entity is assigned one (and only one) disbursement

bank account. In addition, Realty Co has seven clearing

companies, each associated with a disbursement bank

account. Any entity associated with Bank Account 1

will be associated with Clearing Company A; any entity

associated with Bank Account 2 will be associated with

Clearing Company B.

Any journal entry between two (or more) entities

with the same clearing company must use the clearing

company to ensure the journal is balanced. There is no

possibility of any journal entry between two entities with

different clearing companies.

THE SOLUTION

Oracle’s EBS R12 documentation defines the legal

entity as “legal entity” or “company” in which transactions

are recorded or required in day-to-day business

operations. A legal entity is a discrete legal personality

characterized by the legal environment in which it

operates. As stated previously, legal entities have the right

to own property, the right to trade and the responsibility

to comply with appropriate laws.

Under this generally accepted definition, each of

Realty Co’s 1,200 entities would be defined as a “legal

entity” since, for example, AP invoices would need to

be recorded and each of the 1,200 legal entities would

have one (and only one) balancing segment value

assigned to it.

Using the definitions outlined above, a single

intracompany account would need to be defined. It is

unlikely it would be used, since there would only be one

balancing segment value in each legal entity, however, it

would still need to be defined.

In addition, in order to meet Realty Co’s

intercompany requirements, more than 1.4 million

intercompany account combinations would need to be

defined. While technically correct, this approach was

deemed unacceptable, both from a go-live build out, as

well as from an ongoing maintenance perspective.

Reconsidering the definition “transactions are

recorded or required in day-to-day business operations,”

Realty Co sought an alternative approach: rather than

considering the AP invoice (or AR invoice) as the

transaction which is recorded or required in day-to-day

business, what if the AP

payment (or AR receipt)

was the transaction?

Rather than having

1,200 legal entities, each

associated with one (and

only one) balancing

segment value, Realty

Co could define 17 legal

entities, each associated

with multiple balancing

segment values.

Rather than

defining 1,200 intracompany accounts in scenario one,

we would only need to define 17 intracompany accounts

(See Figure 2).

19 oaug.org


Figure 2

Intracompany

Legal Entity 1 Legal Entity 2

Company 2015 transacts with Company 2020.

BS 2015 intracompany receivable BS 2000.

BS 2020 intracompany payable BS 2000.

Balancing 2000Segment



3500

3515

3520

The legal entity configurations for Realty Co show

multiple legal entities defined. However, only two of

these legal entities have balancing segments assigned

to it. This legal entity, “Management LLP” (shown in

Figure 3) owns one bank account (not shown), and has

multiple balancing segment values assigned to it. Payables

invoices charged to any of these balancing segment values

will only be paid by this bank account.

INTRACOMPANY BALANCING RULES

LEGAL ENTITY MANAGEMENT Once a legal entity has a balancing segment value

(or multiple balancing segment values) assigned to it, at

least one intracompany balancing rule must be defined.

Separate intracompany balancing rules can be configured

based on Journal Source and Journal Category, so if you

need one Intracompany account to be used for journals

created from a source of Payables, and a different

account used by journals from Receivables, intracompany

accounting gives you that flexibility. Realty Co used the

same account for all intracompany journals, so was able to

use a source and category of “Other.”

SOURCE AND CATEGORY

BALANCING DETAILS

Once you have defined the journal source and

category to which this intracompany balancing rule

applies, you need to specify the debit and credit accounts

(intracompany receivables, intracompany payables)

account. Within this form, you have the ability to specify

intracompany receivables and payables accounts for each

combination of balancing segment values. You can also

specify intracompany receivables and payables accounts

for all combinations of balancing segment values within

the legal entity by using the “All Other” balancing

segment values. (See Figure 4).

SOURCE AND CATEGORY OPTIONS

You also need to specify some options for how the

intracompany journal entries should be booked, and

these can vary by legal entity. You can specify whether

intracompany journal entries are generated at a journal

line level or whether the intracompany journal entries

should be summarized for the entire journal. You have

O A U G F E A T U R E 20

Figure 3

21 oaug.org

the option to specify whether you should use a clearing

company for all journals or just for journals which have

“many-to-many” intracompany journal lines. To meet

Realty Co’s requirements, any intracompany journal entry

was required to go through a clearing balancing segment.

MARY ROAD INVESTMENTS

Mary Road, a trading firm that operates around the

clock and around the globe, selected Oracle EBS 12.1.3

to assist them in transitioning from a manual Excel-

based, process-driven month-end close and reporting

cycle to an integrated, rapid and agile process.

THE BUSINESS REQUIREMENT

Mary Road has 16 legal entities throughout

the world, and each legal entity has one (and only

one) balancing segment value assigned to it. Mary

Road needed to be able to transact between any

legal entities and even across ledgers. A journal

entry or invoice could be made between any

combinations of legal entities. Rather than use an

intercompany segment in the chart of accounts,

Mary Road wanted to define distinct intercompany

receivable and payable natural accounts for each

legal entity. In addition, Mary Road required that,

for transactions which occurred between legal


Figure 4

22 O A U G F E A T U R E

entities in Europe or Asia, intercompany invoices to

support the transactions had to be generated.

THE SOLUTION

Mary Road required configuration of Oracle EBS

R12.1.3 Intercompany Accounting and Intracompany

accounting (defined for each legal entity but not

documented below as they are similar to what was

done for Realty Co).

Mary Road has 16 legal entities, and each legal

entity has one (and only one) balancing segment value

assigned to it.

Within the intercompany account definition

for legal entity 110, all other balancing segment

values are listed, together with an “All Other,” and

the intercompany accounting for each is defined.

In this example, the relationship between balancing

segment values 110 and 105 was selected and used to

define the intercompany

receivables and payables

account for this

combination (See Figure

5). These accounts have

effective dates, so you are

able to end-date a specific

intercompany receivables

account as of 31-Dec-

2012 and start using a new

intercompany receivables

account on 1-Jan-2013.

It is important to note that when creating an

intercompany relationship, Oracle EBS R12.1.3 does not

generate a reciprocal relationship. For example, when the

relationship in legal entity 110 between companies 110

and 105 was created, Oracle did not create the reciprocal

relationship in legal entity 105 and 110. This will still

need to be defined.

CONCLUSION

Oracle has developed a robust and flexible solution

for handling transactions between legal entities in EBS

Release 12. Use of the legal entity configurator along

with intercompany and intracompany accounting to

automatically balance transactions between multiple legal

entities can save time and money by streamlining the

close process and simplifying month-end intercompany

reconciliations.

While legal entities now play an important role in

EBS R12, it is important to determine if you require

to set all of the legal entities that may exist in your

organization up in Oracle. At the beginning of this article

we asked, When is a Legal Entity not a legal entity? As it

relates to EBS R12 and intercompany and intracompany

configuration, the answer is when that legal entity is

only used to record transactions and hold balances but

is not required to maintain or conduct banking related

transactions. Knowing this distinction and understanding

when and how to use EBS Legal Entities can have a

dramatic impact on your implementation and ongoing

use of EBS.

Thomas Simkiss is the Chief Operating Officer and

Lead Financials Architect at BizTech. Thomas has 15 years

of Oracle Applications experience both as an end-user and

implementer across many industries, including Telecom,

Retail, Membership Organizations, Healthcare, Government,

and Social Services. He is a member of the New Jersey State

Society of Certified Public Accountants, and a member of

the Pennsylvania and New Jersey Bar Association. Contact

Thomas at [email protected] or follow @ThomasSimkiss.

Lee Briggs is the Financials Practice Director for

BizTech. Lee has worked with Oracle for over 13 years in

Financials, Supply Chain and Project Accounting. Lee is the

Chairman of the ADI SIG and presents regularly at local

and national Oracle User Group conferences. Contact Lee at

[email protected] or follow @LeeBriggs. Figure 5

Intercompany

Legal Entity 1 Legal Entity 2

Company BS 105 transacts with Company BS 110.

Intercompany receivable from BS 105.

Intercompany payable to BS 110.

Balancing 110

Segment

Balancing 105

Segment

oaug.org

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