Managing Intercompany transactions for Global Projects
Globalization has changed the way companies do business. Because of increasing competition and pressure on margins they are forced to have multiple Operating Units /Departments and Projects work together on a single deal, yet the customer wishes to receive only one bill. Parts of the work performed may be billed externally to a customer while other work may be billed internally to another project. These types of business needs require a way to capture multiple project costs into one project regardless of where or by whom the work is performed.
Example 1-: During an auto accident, a telephone pole owned by the local telephone company is knocked down. A contract project is set up to track the cost of the repair. These costs will be billed to an insurance company. While the repair is under way, the telephone company decides to replace the old transformer at the top of the downed pole. These costs will need to be capitalized and will be billed internally to a capital project. The contract project will bill the insurance company for repair work performed on the pole, and, using inter-project billing, will bill a receiver project for work performed on the transformer. The receiver project can exist anywhere in the enterprise, regardless of operating unit, set of books, or legal entity.
Example 2: Company ABC is an advertising company with a multiple organization structure. The London operating unit, ABC’s headquarters, received a contract from a German customer. The customer wants ABC to produce and air live shows in Paris, New York, and Tokyo to launch its new line of high-end women’s apparel. ABC will plan and design the show using resources from the London operating unit. The Paris, New York, and Tokyo operating units are each responsible for the successful execution of these live shows with their local resources.
These intercompany transactions between projects are very well supported by Oracle projects both for services as well as inventory transactions. This helps in correct intercompany accounting and netting. This provides a seamless integration with the financial modules to track intercompany transaction and supports transfer pricing.
Below are various business models that the company might have for intercompany projects, which are supported by Oracle Projects.
Intercompany service transaction with a centralized approach-:
In this case, there is a project in the Operating Unit (company) which requires work to be done for it by a project in the other Operating Unit (company). Hence, the expenditure in the providing Operating Unit is charged against the project of the receiver (former) Operating Unit and an intercompany receivable invoice is generated by the provider Operating Unit(on the basis of the transfer pricing defined), which becomes the intercompany payable invoice for the receiver Operating Unit. Final customer billing is done in the receiver Operating Unit only.
Example-: Company A’s London office gets a contract for providing consulting services to the client XYZ. The work on this contract needs to be performed by the Company A’s India office. In case of centralized approach resources of the India office will charge their time directly to the single project created in the London division. Intercompany payable invoice will be generated and only tax lines will be interfaced to the London project, as the cost has already been charged to it.
Intercompany service transaction with a de- centralized (or subcontracting) approach-:
In this case, when there is a project in the Operating Unit (company) which requires work to be done for it by a project in the other Operating Unit (company). The expenditure in the providing OU is charged against the project of the same OU (provider OU) and an intercompany receivable invoice is generated by the provider OU (on the basis of the transfer pricing defined), which becomes the intercompany payable invoice for the receiver OU. This payable invoice is interfaced to the receiver project to calculate the costs against it. Final customer billing is done in the receiver OU only.
Example-: Company A’s London office gets a contract for providing consulting services to the client XYZ. The work on this contract needs to be performed by the Company A’s India office. In case of a decentralized approach the India office will create a separate project for the work and will charge the cost to the London office through intercompany payable invoice. Final client billing will happen for the London project only
Borrowed and lent Transactions-:
In this case though the service or the expenditure is incurred by the provider Operating Unit (company) for the receiver Operating Unit (company) on a project, but no intercompany billing takes place. Only intercompany journal entries are generated and the same are interfaced to the GL.
Intercompany inventory transactions with Projects-:
Because of increasing competition and pressure on margins companies are forced to move their production plants to the locations where they have lowest cost of production. This has posed many challenges for the business systems to accommodate logistics of moving material across locations/legal entities and accounting it correctly, particularly when such inventory is tied to a particular project and has to be moved across operating units. This is only possible in case of organizations enabled for project manufacturing
Please note that projects can support intercompany transfers for all intercompany inventory scenarios like Direct Intercompany Inventory Transfers, IR-ISO, Intercompany Drop ship etc.
So basically using Oracle Projects once can manage inter company transactions very effectively and proper business processes can be set around this.
