Overview of IR-ISO and Intercompany Transactions
1. Definition and Purpose
Internal Requisition-Internal Sales Order (IR-ISO)
- Definition: IR-ISO is a process for transferring goods between inventory organizations (within the same or different operating units) using an internal requisition (IR) that triggers an internal sales order (ISO).
- Purpose: Facilitates the physical movement of goods (e.g., from one warehouse to another) to meet internal demands, ensuring inventory availability across organizations.
- Scope: Focuses on inventory transfers with associated accounting entries for cost tracking. Intercompany invoicing may occur if the transfer crosses operating units (OUs) or legal entities.
Intercompany Transactions
- Definition: Intercompany transactions manage financial and accounting flows between two or more legal entities or operating units within the same enterprise, often involving the sale or transfer of goods/services.
- Purpose: Ensures proper revenue recognition, cost allocation, and elimination of intercompany balances during financial consolidation.
- Scope: Emphasizes financial transactions (e.g., receivables, payables, revenue, and cost) between OUs or legal entities, typically triggered by physical movements like IR-ISO.
2. Key Characteristics
| Aspect | IR-ISO | Intercompany Transactions |
|---|
| Nature | Logistical; focuses on physical goods transfer. | Financial; focuses on accounting and invoicing between entities. |
| Involved Entities | Inventory organizations (same or different OUs). | Different OUs or legal entities. |
| Trigger | Internal requisition in the destination organization. | Sales order or inventory transfer between OUs/legal entities. |
| Invoicing | Optional; only if across OUs with intercompany setup. | Mandatory; AR and AP invoices for financial tracking. |
| Accounting Focus | Inventory valuation and cost of goods sold (COGS). | Intercompany receivables, payables, revenue, and profit elimination. |
| Example | Transferring goods from a US warehouse to a Canada warehouse. | Selling goods from a US OU to a Canada OU, with AR/AP invoices. |
3. Process Flow
IR-ISO Process
- Create Internal Requisition (IR): The requesting inventory organization creates an IR in Oracle Purchasing.
- Create Internal Sales Order (ISO): The IR is converted into an ISO in the shipping organization’s OU via Oracle Order Management.
- Release and Ship Order: The shipping organization releases the order, transacts a move order, and ships the goods (logical or physical).
- Receive Goods: The destination organization receives the goods, updating inventory.
- Accounting: Inventory accounts are updated (e.g., inventory asset credited in the shipping org, debited in the receiving org). Intercompany invoicing may occur if OUs differ.
Intercompany Transactions Process
- Trigger Event: Initiated by an IR-ISO or direct sales order where the booking OU differs from the shipping OU.
- Intercompany AR Invoice: The shipping OU generates an intercompany accounts receivable (AR) invoice to bill the selling OU at a transfer price.
- Intercompany AP Invoice: The selling OU records an intercompany accounts payable (AP) invoice for the liability to the shipping OU.
- Customer Invoice: If an external customer is involved, the selling OU issues an AR invoice to the customer.
- Programs:
- Run Create Intercompany AR Invoices.
- Run Create Intercompany AP Invoices.
- Run AutoInvoice Master Program and Payables Open Interface Program.
- Accounting: Updates intercompany receivables, payables, revenue, and COGS; balances are reconciled for consolidation.
4. Costing Details
Costing in Oracle EBS R12 is managed through the Cost Management module, which supports various costing methods (e.g., Standard Costing, Average Costing, FIFO, LIFO). The costing approach for IR-ISO and Intercompany Transactions differs based on their focus (inventory vs. financial) and setup.
Costing in IR-ISO
Overview
- IR-ISO focuses on the cost of goods transferred between inventory organizations, ensuring accurate inventory valuation in both the shipping and receiving organizations.
- The cost is derived from the item cost in the shipping organization, based on the costing method used (e.g., Standard, Average, FIFO).
- If the transfer crosses OUs or legal entities, a transfer price may be applied, which can include a markup or be based on a price list.
Costing Mechanism
- Item Cost in Shipping Organization:
- The cost is determined by the inventory organization’s costing method:
- Standard Costing: Uses a predefined standard cost for the item, updated periodically.
- Average Costing: Uses the weighted average cost based on purchase and transfer costs.
- FIFO/LIFO: Uses the cost of the earliest (FIFO) or latest (LIFO) inventory layer.
- Example: If an item has a standard cost of $10 in the shipping organization, this is the base cost for the transfer.
- Transfer Price (if applicable):
- For transfers within the same OU, the transfer typically uses the item cost without markup.
- For transfers across OUs, a transfer price may be applied (e.g., cost plus markup, price list, or Oracle Advanced Pricing rules).
- The transfer price is used if intercompany invoicing is enabled, affecting the financial accounting but not the inventory cost.
- Example: If the item cost is $10 and the transfer price is $12 (with a $2 markup), the receiving OU pays $12 in the intercompany invoice, but the inventory cost remains $10.
- Accounting Entries:
- Shipping Organization:
- Debit: Inter-org Receivable (or COGS if intercompany)
- Credit: Inventory Asset (at item cost)
- Receiving Organization:
- Debit: Inventory Asset (at item cost)
- Credit: Inter-org Payable (or AP if intercompany)
- If a transfer price is used, the difference (e.g., $2 markup) is recorded as revenue or profit in the shipping OU and as an expense in the receiving OU.
- Cost Updates:
- The receiving organization inherits the item cost from the shipping organization unless a different costing method is used.
- For Intransit transfers, the cost is recorded when the goods are shipped and updated upon receipt.
- For Direct transfers, the cost is immediately transferred to the receiving organization’s inventory.
Key Considerations
- Costing Method Consistency: Both organizations should ideally use the same costing method to avoid discrepancies in inventory valuation.
- Intransit Ownership: If the transfer uses “Intransit” shipment, the FOB (Freight on Board) point determines when ownership (and cost) transfers.
- Markup Handling: Any markup in the transfer price is purely financial and does not affect the inventory cost unless explicitly configured.
Costing in Intercompany Transactions
Overview
- Intercompany transactions focus on the financial cost of goods or services transferred between OUs or legal entities, emphasizing transfer pricing, revenue recognition, and profit elimination.
- The costing process builds on the inventory cost from IR-ISO (if applicable) but introduces a transfer price to manage financial flows and intercompany profit.
Costing Mechanism
- Base Inventory Cost:
- The starting point is the item cost in the shipping organization, determined by its costing method (Standard, Average, FIFO, etc.).
- Example: An item with a standard cost of $10 in the shipping OU.
- Transfer Price:
- The transfer price is the price at which the shipping OU “sells” the goods to the receiving OU. It can be:
- Cost-based: Item cost plus a fixed markup (e.g., $10 + 20% = $12).
- Price List: A predefined price list in Oracle Order Management or Advanced Pricing.
- Dynamic: Calculated using Oracle Advanced Pricing rules or an external API.
- The transfer price is used to generate intercompany AR and AP invoices.
- Example: If the transfer price is $12, the shipping OU invoices the receiving OU for $12, even though the inventory cost is $10.
- Accounting Entries:
- Shipping Organization (Selling OU):
- Debit: Intercompany Receivables ($12, transfer price)
- Credit: Revenue ($12) or Intercompany COGS ($10, inventory cost)
- The difference ($2) represents intercompany profit.
- Receiving Organization (Buying OU):
- Debit: Intercompany COGS or Inventory ($12, transfer price)
- Credit: Intercompany Payables ($12)
- If the receiving OU resells the goods to an external customer, it records:
- Debit: Accounts Receivable (customer sale price, e.g., $15)
- Credit: Revenue ($15)
- Debit: COGS ($12, based on transfer price)
- Credit: Inventory ($12)
- Intercompany Profit Elimination:
- The markup ($2 in the example) is tracked as intercompany profit and must be eliminated during financial consolidation to avoid overstating revenue and profit.
- Oracle General Ledger or AGIS handles elimination entries, typically:
- Debit: Revenue ($2)
- Credit: COGS ($2)
- Cost Flow in Multi-Step Transactions:
- In scenarios where the shipping OU differs from the selling OU (e.g., drop shipment), multiple intercompany transactions may occur:
- Shipping OU invoices Selling OU at transfer price.
- Selling OU invoices the external customer at the sale price.
- Each step involves AR/AP invoices and cost accounting.
Key Considerations
- Transfer Price Setup: Critical for determining financial flows. Must comply with tax regulations (e.g., arm’s length principle for cross-border transactions).
- Currency Conversion: If OUs use different currencies, the transfer price is converted using the exchange rate defined in the intercompany setup.
- AGIS Role: The Advanced Global Intercompany System (AGIS) streamlines transfer pricing, invoicing, and reconciliation, especially for complex multi-entity transactions.
- Tax Implications: Intercompany transactions may require tax calculations (e.g., VAT, GST) depending on the jurisdictions of the OUs.
5. Setup Requirements
IR-ISO Setup
- Inventory Organizations: Define source and destination organizations in Oracle Inventory.
- Shipping Network: Set up the shipping network (Inventory > Setup > Organizations > Shipping Networks) with transfer types (Intransit/Direct) and FOB points.
- Internal Customer: Define the destination organization as a customer in Oracle Receivables, mapped to the inventory organization.
- Internal Order Required: Enable this option in the shipping network.
- Pricing: Set up a price list for transfer pricing if intercompany invoicing is required.
- Costing Setup:
- Define costing methods (Standard, Average, FIFO, etc.) for each inventory organization (Cost Management > Setup > Cost Types).
- Ensure item costs are defined (Inventory > Items > Item Costs).
Intercompany Transactions Setup
- Intercompany Relations: Define relationships between OUs (Inventory > Setup > Organizations > Intercompany Transaction Flows), specifying:
- Customer/supplier details for AR/AP.
- Intercompany accounts (IC Receivables, IC Payables, IC COGS).
- Transfer price logic (price list, advanced pricing, or API).
- Transaction Types: Define intercompany transaction types in Oracle Receivables (Receivables > Setup > Transactions > Transaction Types).
- AutoAccounting Rules: Configure rules for intercompany accounts.
- AGIS (optional): Use AGIS for batch processing, approvals, and reconciliation.
- Costing Setup:
- Define transfer price rules in Oracle Order Management or Advanced Pricing.
- Set up intercompany profit tracking accounts in the General Ledger.
- Configure elimination rules for intercompany profit in GL or AGIS.
6. Key Differences (Including Costing)
| Feature | IR-ISO | Intercompany Transactions |
|---|
| Primary Module | Inventory, Purchasing, Order Management. | Receivables, Payables, General Ledger, AGIS. |
| Focus | Physical movement of goods; inventory costing. | Financial accounting; transfer pricing and profit elimination. |
| Costing Basis | Item cost based on costing method (Standard, Average, FIFO). | Transfer price (item cost + markup or price list) for financial flows. |
| Invoicing | Optional; only if across OUs. | Mandatory; AR/AP invoices for financial tracking. |
| Cost Accounting | Inventory asset transfer at item cost; no profit tracking unless invoiced. | Tracks intercompany profit (markup) and eliminates it during consolidation. |
| Profit Tracking | Limited to transfer price costing, if enabled. | Explicitly tracks and eliminates intercompany profit. |
| Tax Implications | Minimal unless intercompany invoicing is triggered. | Requires tax compliance (e.g., VAT, GST) for cross-border transactions. |
7. Example Scenario with Costing
IR-ISO Example
- Scenario: A US warehouse (Vision Operations) transfers 100 units of an item to a Canada warehouse (Vision Canada). Item cost is $10 (Standard Costing).
- Process:
- Vision Canada creates an IR for 100 units.
- Vision Operations converts it to an ISO, ships the goods, and updates inventory.
- Vision Canada receives the goods.
- Costing:
- Shipping Org (Vision Operations):
- Debit: Inter-org Receivable ($10 × 100 = $1,000)
- Credit: Inventory Asset ($1,000)
- Receiving Org (Vision Canada):
- Debit: Inventory Asset ($1,000)
- Credit: Inter-org Payable ($1,000)
- If a transfer price of $12/unit is used (due to intercompany setup):
- Vision Operations invoices Vision Canada for $12 × 100 = $1,200.
- Inventory cost remains $1,000; the $200 difference is financial profit.
Intercompany Transactions Example
- Scenario: Vision Operations (US) sells goods to an external customer for $15/unit, but the goods are shipped from Vision Japan’s warehouse. Item cost is $10; transfer price is $12.
- Process:
- Vision Operations books the sales order and invoices the customer for $15 × 100 = $1,500.
- Vision Japan ships the goods and creates an intercompany AR invoice for $12 × 100 = $1,200.
- Vision Operations records an intercompany AP invoice for $1,200.
- Costing:
- Shipping Org (Vision Japan):
- Debit: Intercompany Receivables ($1,200)
- Credit: Revenue ($1,200)
- Debit: COGS ($1,000, inventory cost)
- Credit: Inventory ($1,000)
- Intercompany profit: $1,200 - $1,000 = $200
- Selling Org (Vision Operations):
- Debit: Intercompany COGS ($1,200)
- Credit: Intercompany Payables ($1,200)
- External sale:
- Debit: Accounts Receivable ($1,500)
- Credit: Revenue ($1,500)
- Debit: COGS ($1,200)
- Credit: Inventory ($1,200)
- Consolidation:
- Eliminate $200 intercompany profit:
- Debit: Revenue ($200)
- Credit: COGS ($200)
8. Additional Notes
- Overlap: IR-ISO can trigger intercompany transactions when transfers occur across OUs/legal entities, requiring transfer pricing and invoicing.
- Costing Method Impact: The choice of costing method (Standard, Average, FIFO) affects inventory valuation in IR-ISO, while transfer pricing drives financial accounting in intercompany transactions.
- AGIS: Enhances intercompany transaction management with automated invoicing, approvals, and profit elimination.
- Tax and Compliance: Intercompany transactions must comply with transfer pricing regulations (e.g., OECD guidelines) to avoid tax penalties, especially for cross-border transfers.
- Performance: Ensure costing setups (e.g., item costs, transfer prices) are accurate to avoid reconciliation issues in inventory and financial reports.
