Oracle R12 A/P Accruals OAUG Cost Mgmt SIG Meeting March 15, 2011 Douglas Volz Douglas Volz Consulting doug@volzconsulting.com

Introduction Learn about the Oracle inventory and expense accrual processes for Release 12 Find out about the available improvements Discuss the underlying business processes Discuss current problems you may have Slide 2

Agenda Welcome to Our Session! Cost Management SIG Business Release 12 A/P Accruals Why are these accrual processes so important? Periodic vs. perpetual accruals Basic accounting entries for the A/P accruals Setup steps for the accrual processes Using the Accrual Reconciliation Reports Using the expense accrual processes Summary of Release 12 Enhancements Conclusions Slide 3

OAUG Cost Management SIG Business Collaborate11 – April 10th to 14th OAUG Cost Mgmt SIG Meeting April 11, 2011, 9:15am to 10:15am Room W311H Oracle OpenWorld Call for Papers – March 9th to March 27th OpenWorld 2011 October 2-6, 2011 Call for papers url: https://oracleus.wingateweb.com/portal/cfp/cfpLogin.ww;jsessionid=abcKMIA3cEszN7U97gH6s Open vacancy for OAUG Cost SIG Membership Chairperson Questions, concerns, ideas for the OAUG Cost Mgmt SIG: Doug Volz doug@volzconsulting.com Jerry Devore jerry.devore@gmail.com Sharon Widmer s_widmer@comcast.net Slide 4

Release 12 A/P Accruals Slide 5

Why Are These Accrual Processes so Important? Valuable integration control Monitors accuracy of receiving and payables processes Provides a vital barometer over these activities Helps to ensure accurate inventory counts Ultimately affects your profits Slide 6

What Are These Accrual Accounts? Principle of accrual accounting Timing difference between receiving and invoicing Represents the accrued liability from your vendors or suppliers Slide 7

Periodic Versus Perpetual Accruals Periodic accruals occurs at month-end With computers came perpetual accruals Perpetual accruals ensure that valued quantities equals accounting entries Don’t accrue expenses upon receipt (unless you are a governmental agency or heavily into Project Control) Slide 8

Why Not Use Perpetual Accruals for Expenses? Receiving inspection then includes both assets and expenses Have to reclass balances Doubles the accrual entries that you need to reconcile Significantly more entries to review, research, and correct Increased processing for the Accrual Reconciliation programs Slide 9

Background Information for A/P Accruals PO HEADERS (PO_HEADERS_ALL) May have multiple lines per PO May have multiple scheduled receipts and PO releases per line May have multiple PO distributions per line or scheduled receipt Four stored accounts per PO distribution PO LINES (PO_LINES_ALL) PO SHIPMENTS (PO_LINE_LOCATIONS_ALL) PO RELEASES (PO_RELEASES_ALL) PO DISTRIBUTIONS (PO_DISTRIBUTIONS_ALL) Slide 10

More Background Information Expense Destination Inventory / WIP Destination Cost Center or Expense Account Default Subinv. or Org Mat’l Acct Expense A/P Accrual Account Inventory A/P Accrual Account Inventory IPV Account Expense Budget Account Default Subinv/Org Encumbrance Account Type of Account Charge Account Accrual Account Variance (IPV) Account Budget Account Slide 11

Accrual Accounting Entries – Perpetual Accruals Releases 10 to 11.5.9 Purchase order receipt A/P Invoice match PO Return to vendor A/P Invoice correction PO Receipt delivery Expense A/P accrual Release 11.5.10 Transfer to Regular (consignment) Internal Orders / Logical Transactions Retroactive Price Adjustments Release 12 Slide 12

Accounting Entries for a PO Receipt Receive one item @ $100 PO unit price Account Debit Credit Receiving Account 100 A/P Accrual Account 100 Receiving Value Account Inventory A/P Accrual Account 100 100 Slide 13

Accounting Entries for an A/P Invoice Match Same item, $80 invoice unit price, $100 PO unit price Account Debit Credit A/P Accrual Account 100 A/P Trade Payables 80 Invoice Price Variance 20 A/P Accrual Account A/P Trade Payables 100 80 Invoice Price Variance 20 Slide 14

Accounting Entries for a PO Return to Vendor Same item, $100 PO unit price Account Debit Credit A/P Accrual Account 100 Receiving Account 100 A/P Accrual Account Receiving Account 100 100 Slide 15

Accounting Entries for an A/P Invoice Correction Same item, $80 invoice unit price Account Debit Credit New Charge Account 80 Old Charge Account 80 New Charge Account Old Charge Account 80 80 Slide 16

Accounting Entries for PO Receipt Deliveries Account Debit Credit Delivery to stock inventory (PO Receipt) Material (Subinv/Org) Account XXX Receiving Account XXX Delivery to WIP inventory (Outside Processing Receipt) Job OSP Account XXX Receiving Account XXX If using standard costing you may have PPV entries as well Slide 17

Purchase Order Accounting Accrual Summary by T Account Transaction Receipt Delivery to Stock Invoice Match Receiving Value Inventory A/P Accrual 100 100 100 Material Value Invoice Price Variance 20 Trade Payables 80 Slide 18

Accounting Entries for Inventory Consignment Account Debit Credit Delivery to stock inventory (PO Receipt for ”Transfer to Regular”) Material (Subinv/Org) Account XXX AP Accrual Account XXX Transfer to WIP inventory (Backflush from Subinventory above) WIP Material Account XXX Material (Subinv/Org) Account XXX Available feature since Release 11.5.10 Slide 19

Accounting Entries for Internal Orders Receipt into Inventory (Internal Order Intransit Ship) Account Debit Credit Subinv. or Org Accounts XXX AP Accrual Account XXX Intercompany Invoice Match (Payables) I/C A/P Accrual Account XXX Trade Payables Account XXX Reported on Miscellaneous Accrual Report Slide 20

Month-End Period Accruals For expenses only Account Debit Credit Charge Account XXX Expense A/P Accrual Account XXX Release 11i, run the Receipt Accruals Period End program Creates entries directly into the G/L Interface lines Then run Journal Import Release 12, run the Receipt Accruals Period End program Creates Receiving Accounting Distributions Then run Create Accounting Program to create SLA entries and Run Transfer Journal Entries to G/L program, or (optionally) transfer to G/L at same time as Create Accounting is run Next accounting Period, reverse the Accrual: R11i: In the G/L find the G/L Batch Header and click on Reverse Batch R12: The reversal entry is automatically done for you Slide 21

Where You Setup the Accrual Processes Setup in Oracle Purchasing Setup in Oracle Inventory Slide 22

Setup in Oracle Purchasing Use the Define Purchasing Options Form Set the Expense Accrual Account Set the Accrual Options for Expenses Slide 23

Setup in Oracle Purchasing Use the Define Receiving Options for each Org: Receiving Account Retroactive Price Adjustment Slide 24

When Defining Purchase Orders Much safer, harder to find the Accrue on Receipt Flag You have to set up the Accrue on Receipt field on your folder form before you can see the Accrue on Receipt settings Slide 25

Setup in Oracle Inventory Organization Parameters ─ Inventory AP Accrual Account Set your PPV and IPV Accounts Set your Inventory A/P Accrual Account Slide 26

Setup in Oracle Inventory (cont’d) Intercompany Accrual Accounts Separate inventory and expense accrual accounts for intercompany A/P accruals Slide 27

New R12 Setup For A/P Accruals List of A/P Accrual Accounts to Reconcile Slide 28

Caution Use separate accounts for each type of system account: Expense A/P Accrual Account Inventory A/P Accrual Account Receiving Account Expense Purchase Order Charge Accounts Other inventory, WIP and price variance accounts Teach Payables staff to not use the A/P Accrual Account This account should be always assigned automatically Or set up G/L security rules to prevent use Slide 29

R12 Accrual Reconciliation and Write-Off Major Enhancement 11i issues Poor Performance Full data load causing years of accrual distributions being loaded and reloaded again Inflexibility and Confusion Forms and Reports are data dumps. Difficult to identify the transaction to write off Data can not be exported in excel format. Possibility for Errors Manual write-off to GL can lead to errors and mistakes No Summary Reporting R12 Enhancements Enhanced Performance Incremental data load using from and to date to load data with outstanding accrual balances only Support writing off balances Increased Usability Headers and lines separation Summarization display AP PO data only Miscellaneous data only Data exportable to excel Will help user for investigation Mass write-off Automatic Accounting Creation No more manual adjustment to GL Write-off will post to SLA as any other distributions Slide 30 Slides courtesy of Oracle Cost Development

R12 Accrual Reconciliation and Write-Off Major Enhancement Recap Performance enhancement: Incremental load Accrual data only with outstanding balance Usability enhancement: Information categorized using specific windows and reports AP and PO Accrual data Miscellaneous AP and Inventory Writing off accrual balance at PO distribution Ability to export Accrual data reported in excel format Mass write-off Remove possible financial mistakes: Automatic accrual write-offs posting to the GL Slide 31 Slides courtesy of Oracle Cost Development

New R12 Table Structure Permanent table structures CST_ACCRUAL_ACCOUNTS (holds valid accrual accounts) CST_AP_PO_RECONCILIATION (matched AP/PO entries w/outstanding balances) CST_MISC_RECONCILIATION (unmatched AP and INV entries) CST_RECONCILIATION_BUILD (accrual load submissions) CST_RECONCILIATION_SUMMARY (summary of CST_AP_PO_RECONCILIATION) CST_WRITE_OFFS (write-off transaction header table) CST_WRITE_OFF_DETAILS (write-off transaction details table) Slide 32

R12 Accrual Reconciliation and Write-Off Functional Flow Slide 33 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Define your Accrual Account Slide 34 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Run Accrual Load Program Slide 35 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Accrual Load Program Accrual data load run as a standalone concurrent program Incremental load: Load is run for a specific date range. Transactional data picked up only from the data range specified Accrual data is summarized and accrual balances are calculated at the PO distribution level PO, A/P and Write Off balances as well as last activity date Zero balance accrual data are deleted from the table, this should eliminate 80%+ of the data Slide 36 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Run Summary Accrual Reconciliation Report Slide 37 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Summary Accrual Reconciliation Step3 Report: Summary Accrual Reconciliation Slide 38 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Run AP and PO Accrual Reconciliation Report Slide 39 Slides courtesy of Oracle Cost Development

R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - Reconciliation Report… We decide to write this balance off for these un-billed receipts Slide 40 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - Write-Off Window… We begin by looking for the PO balance we want to write off… Submit the Write Off and the balance disappears online Slide 41 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - AP PO Write Off… If you resubmit the AP PO Accrual Reconciliation report… ….The PO#5418 disappeared Slide 42 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - View Write Off for AP PO… If you query the write off View Window, you will find your write off transactions… All Write off transactions for the PO Distribution balance will be displayed Slide 43 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - Write Off Reversal … You can reverse the write off transaction if you think error has been made… A write-off reversal transaction has been created to offset the previous write off Slide 44 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - Write Off Reversal… From AP PO Write Off Window, the PO balance re-appears… The PO balance is again available for write off Slide 45 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: AP and PO Accrual Example - Write Off Reversal… AP PO Accrual Reconciliation Report shows the PO balance again… The PO balance shows up again Slide 46 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Accrual Reconciliation Process: Accrual Data life Cycle Slide 47 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Accrual Reconciliation: Major Benefits Write Off Activity is tracked by a Write Off transaction Enhance the control of the write off activity Enhance audit ability Only accrual data with outstanding balance will be kept in the accrual reconciliation tables Decrease the volume of data Enhance the performance Enhance the usability Slide 48 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Functional Flow: Run Miscellaneous Accrual Reconciliation Report Slide 49 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Miscellaneous Accrual Reconciliation Report Slide 50 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Miscellaneous Accrual Reconciliation: Miscellaneous Write-Off Window Slide 51 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Miscellaneous Accrual Reconciliation: Miscellaneous Write-Off Window Slide 52 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Write Off transaction Accounting: Leverage Sub Ledger Accounting To post the accounting to the GL, we can execute the “Create Accounting – Cost Management” process with the process category “Receiving”… Upon completion of the process the accounting report will show the status of the accounting Slide 53 Slides courtesy of Oracle Cost Development

Slides courtesy of Oracle Cost Development R12 Accrual Reconciliation and Write-Off Write Off transaction Accounting: Leverage Sub Ledger Accounting – Continue… Once posted the SLA accounting entries are viewable online in the view write off Window… Slide 54 Slides courtesy of Oracle Cost Development

Summary Comparison for R11i and R12 R11i: Inventory A/P Accruals Accrual Reconciliation Report – detail report Write-Off Accrual Screen/Form Accrual Write-Off Reports R12: Inventory A/P Accruals Accrual Reconciliation Detail and Summary Reports Separate write-off forms for AP/PO vs. Inventory transactions When you write off entries you create Write-Off journal entries New Reports AP and PO Accrual Reconciliation Report Summary Accrual Reconciliation Report Miscellaneous Accrual Reconciliation Report Slide 55

How to Balance the Accrual Reconciliation Report Only picks up transactions available to the general ledger Create Accounting – Final mode has been run Use Subledger Accounting or G/L reports to reconcile Subledger Accounting – Journal Entries Report Account Analysis Reports General Ledger summary and journal line reports Or use original accounting distribution reports Receiving Account Distribution Report Payables Account Analysis Report Material Distribution Summary Report Slide 56

What to Check If the Perpetual Accruals do Not Balance Check for any conversion issues Check for manual G/L journal entries Make sure create accounting has been run Slide 57

Process Problems for Receiving Why receipts do not equal invoices Wrong receipt quantities (quantity and/or UOM is incorrect) Receiving goods to the wrong PO line or PO Trying to receive or return goods using miscellaneous inventory transactions Routine over receipts with correct invoice quantities Slide 58

Process Problems for Payables Why invoices do not equal receipts Incorrect invoice quantities (UOM is wrong, etc.) Payables not processing debit memos correctly Expenses, invoice price or exchange rate variances miscoded Payables matching the invoice to the wrong PO, PO line or PO Release Not matching invoices to POs at all Slide 59

Process Problems for Purchasing Why invoices may not be processed correctly Purchase orders prematurely closed or “final closed” Purged purchase orders Incorrect purchase order unit prices Late or no purchase orders created for the receipt Slide 60

Expense A/P Accruals Expense A/P Accruals – for both R11i and R12 Uninvoiced Receipts Report Supporting backup for your month-end expense accruals Run this report BEFORE running the Receipts Accrual – Period End program Receipts Accrual – Period End program This program creates your month-end expense accruals Payables has to be closed BEFORE you run this month-end Purchasing program R11i only creates entries into the G/L Interface R12 creates Receiving accounting distributions Slide 61

How to Run the Expense Accrual Programs and Reports Run the Uninvoiced Receipts Report by specifying Accrued Receipts: No (before running the month-end process), Yes (after running the month-end process), Include On-line accruals: No The desired Period Name And the desired sort selection (purchasing Category or Vendor) Slide 62

How to Run the Expense Accrual Programs and Reports Run the Receipt Accruals – Period-End program after A/P is closed Enter the Minimum Accrual Amount Leave Supplier and Item Category information blank Select the accounting period Purchasing Period must be OPEN, G/L Period must be OPEN and A/P Period must be CLOSED. When Purchasing is closed the expense receipts are un-marked Slide 63

How to Balance the Receipt Accrual - Period End Process Use careful cut-off controls for receipt and invoice transactions Close purchase orders and lines after you have reconciled the Expense A/P Accrual Account Uninvoiced Receipts Report should agree to your Receipt Accruals - Period-End journals R11i: Goes directly into your General Ledger Interface table R12: Goes directly into your Receiving Accounting Distributions Make sure you match your expense A/P invoices to your expense PO receipts Slide 64

How to Balance the Receipt Accrual - Period End Process Caution, for earlier R12.0x and 12.1 Releases: For both online and period-end accruals, both accounting entries use the journal category of Receiving See Metalink Note: How To Change The Seeded Default Journal Category from "Receiving" to Accrual"? [ID 555547.1] Slide 65

Implementation Issues (Mistakes You Don’t Want to Make) Sharing system accounts Badly defined receiving and payables processes Little or no system testing for your accrual processes After “go live”, late review for the first Accrual Reconciliation Report If your company has badly defined and/or badly executed PO Receipt and A/P Invoice Match processes you will have a mess! Slide 66

Release 12 A/P Accrual Issues XML or BI Publisher Reports can become quite huge (especially if your Procurement and Payment processes are broken) Inventory A/P accrual entries are reported on the Miscellaneous Accrual Reconciliation Report, even for Inter-Company Internal Orders or Logical Shipments/Logical Receipts (depending on FOB) Accrual Reconciliation Load Run will fail if run more than one Accrual Reconciliation Load at a time Slide 67

Release 12 Summary - Major Rewrite for A/P Accruals Each month’s accrual entries are loaded incrementally No more cumulative loading each month for the Accrual Temp table (no longer temporary) PO and A/P entries which balance to zero are matched and removed Much better performance and less tablespace too Separately define what are valid A/P Accrual Accounts Easier to exclude invalid PO and A/P entries Matching is done at the PO distribution level (effectively at the PO Release level when using PO Releases) Slide 68

Release 12 Summary - Major Rewrite for A/P Accruals Summary and Detail Accrual Reconciliation Reports Summary reporting by account Detail reporting with separate headings from report detail Uses XML/BI Publisher – download reports into Excel Separate reports for matching vs. non-matching miscellaneous entries (A/P, Inventory entries) Ability to do mass A/P Accrual Write-Offs Write-offs use SLA (sub-ledger architecture) and now create journal entries Can do write-offs at the PO distribution level With better write-off reporting Slide 69

Conclusions These accrual processes are very important in ensuring your margins are accurate Proper implementation and data conversion is essential Requires accurate receiving and A/P matching processes Release 12 has major enhancements to consider Slide 70

Where to get more information Douglas Volz Consulting Collaborate08: How to Setup and Use Your A/P Accruals (R11i) http://www.volzconsulting.com/resources.html Oracle Corporation Metalink: FAQ For On Line Accruals & Accrual Reconciliation Reports [ID: 433683.1] Impact of R12 Design in PO Accounting, [ID: 429105.1] R12 How To Diagnose And Reconcile Inventory AP Accrual Transactions Using Reconciliation Reports [ID 728871.1] Master Note For Oracle EBS Procurement Suite - Encumbrance And Accrual Accounting [ID 1138043.1] Oracle Purchasing User Guide Oracle Cost EBS Public Forum: http://forums.oracle.com/forums/forum.jspa?forumID=414 Slide 71

Acknowledgements You, the OAUG Cost Mgmt SIG, thanks for attending this session Oracle Cost Development Partners in crime at my clients over the years

Douglas Volz (doug@volzconsulting.com) Professional Background Doug Volz is a Senior Architect and Advisor for Oracle Application projects, with a particular interest in Cost and Project Management. He has 30 years accumulated experience, including 5 years in Oracle Development (co-designing Oracle Cost Management) and 12 years in industry in Cost and Accounting Management positions. His Manufacturing and Cost systems experience covers project management, software design/development, delivery and consulting services, for both Oracle Corporation, and multiple international consulting firms. Prior to his systems career, Mr. Volz also held numerous management accounting positions for telecommunications, defense, and electronics companies. In his consulting roles Doug has served over 100 clients. Many of these were multi-org, multi-currency with global footprints. Countries include US, Mexico, UK, Netherlands, Belgium, Taiwan, P.R.O.C., Norway, Japan, Italy, Switzerland and Germany. Doug leads the OAUG Cost Management Special Interest Group. He also advises and participates on the Oracle Customer Advisory Board for Fusion Costing. Core Expertise Experience Multi-organization, Multi-currency ERP Implementations Project Management and Senior Project Advisor Core manufacturing processes Cost Management Inventory Bills of Material WIP Systems Integration and Data Conversions Sample of clients served: Beckman Coulter (US) Matsushita (UK, Mexico) Logitech (US, Taiwan, P.R.C.) Celgene Corporation (US, Switzerland) NTL (UK, now Virgin Media) TCI International (US) Onninen AS (Norway) Slide 73 73

Thank You for Your Attendance and Participation 74