Overview of Intercompany Settlement Methods (P0000)

Purpose

Overview

Intercompany settlements ensure that each company’s net balance equals zero i.e. debits equal credits. If your business enters transactions between companies, the companies will be out of balance unless you create and post intercompany balancing entries. You can either create these settlements yourself or choose a method of intercompany settlements to use and have the system create them automatically. You can select one of the following intercompany settlement methods to use:

• Hub method
• Detail method
• Configured Hub method

When you post transactions using one of these methods, the system creates journal entries for intercompany settlements based on automatic accounting instructions (AAIs). The system tracks the transaction settlements through subledgers. Each company that is involved in an intercompany settlement has an automatic offset to the appropriate intercompany account with the subledger equal to the address book number of the offsetting company. The system uses the subledger field to record the other company that is involved in the transaction.

Example: A typical intercompany transaction between Companies 00001 (1.1110) and 91009 (91009.1105) will look like as follows:

• 1.1291 and 91009.1291 are the intercompany accounts for 00001 and 91009 companies respectively.
• The system generated intercompany transactions have
• Document type as 'AE'.
• Subledger Type as 'A' for Address Number.
• Subledger Value as the address book number of the offsetting company.

Scope

This document is intended for Finance Functional users who will be involved in setting up of General Accounting Constants in the General Accounting system.

Details

Setup

Intercompany Settlements Constant (P0000)

Setup the Intercompany Settlements field in the General Accounting Constants (P0000) to specify the method that the system uses to automatically create journal entries between companies within an organization.

* Valid values that can be setup for Intercompany Settlements are as follows:

• '1' Hub method
• Create intercompany settlements using a hub company.

• '2' Detail method
• Create intercompany settlements without a hub company.
• This method is also valid for multicurrency processing.

• '3' Configured hub method
• Create intercompany settlements using a configured hub.
• This method is also valid for multicurrency processing.

• 'N' No intercompany transactions
• Do not create intercompany settlements.
• The system does not post a batch if it contains intercompany transactions.

• '*' Manual intercompany settlements
• Do not create intercompany settlements.
• The system posts a batch but does not create balancing entries for the companies if it contains intercompany transactions.
• You must manually create the balancing entries that show on the General Ledger Post Report (R09801).

Offset Method (P0000)

The intercompany settlement method that you specify in the General Accounting Constants program must be compatible with the offset method specified in the Accounts Receivable Constants and Accounts Payable Constants programs. The offset entry method is the method that the system uses when posting vouchers, payments, invoices, receipts, and drafts to the Account Ledger table (F0911). If the methods are not compatible, the system issues an error message when you post transactions to the general ledger. Following table shows the intercompany settlement methods and their compatibility with the Accounts Receivable and Accounts Payable offset methods:

Intercompany Settlement Accounts (P0901)

Set up intercompany accounts using the Accounts by Object program (P0901). For the hub, detail, or configured hub method, set up one intercompany settlement account for each company. It is recommended that you use:

• A business unit number that is equal to the company number.
• The same object account for all intercompany receivables and payables accounts to facilitate inquiry, reconciliation, and consolidation.
• A posting edit code (PEC) of 'M' (machine-generated only). This posting edit code allows only entries that were created by the system and protects the integrity of the account.

Example: Intercompany Accounts

Following example shows the recommended setup for each company and intercompany object account:

Intercompany Settlement AAIs (P0012)

After you set up the intercompany settlement accounts for each company, you can reference these accounts in the intercompany AAIs. Thus, the system knows the accounts for which to create balancing entries during the post. The two AAI items for intercompany settlements are ICCC and ICH. You use ICCC for all intercompany settlements. Additionally, you use ICH for the hub method.

Hub Method

For the hub method, it is required to setup both of the intercompany settlement AAIs - ICH and ICCC.

Detail and Configured Hub Methods

For the detail and configured hub methods, you setup only AAI item ICCC.

ICH (Intercompany Hub)

This item defines the hub company. Observe these guidelines when setting up AAI item ICH:

• Only one AAI item ICH can exist.
• You must set up AAI item ICH for company 00000.
• You must enter a business unit and an object account.
• The subsidiary account is optional.

ICCC (Intercompany Business Unit)

This item defines the non-hub companies. Observe these guidelines when setting up AAI item ICCC:

• You must set up a separate AAI item ICCC for each non-hub company that exists in the F0010 table, regardless of whether the company is involved in intercompany settlements.
• You do not need to set up an ICCC for the hub company.
• The company of the account must be the same as the company specified in the AAI.
• You must enter a business unit and an object account.
• The subsidiary account is optional.

Example: AAIs for the Hub Method

This example shows the AAI items ICH and ICCC with Hub Company designated as base company 00000:

Example: AAIs for the Detail and Configured Hub Methods

This example shows the recommended AAI setup:

Setting Up Companies in Address Book

For all three intercompany settlement methods, the system uses subledgers with subledger type A (address book) when creating intercompany settlement entries. Therefore, all companies in the F0010 table must be set up in the address book even those that do not use intercompany settlements.

Observe the following recommendations:

• When you set up a company as address book number using the Address Book Revisions program (P01012), you use the same number that is assigned to the company in the Company Names & Numbers program (P0010).
• If you are unable to use the same number, you must create a cross-reference between the two different numbers by entering the address book number in the Company Address Number field on the Company Setup form.
• If you leave this field blank, the system assumes that the address book number is the same as the company number and it uses it as the subledger for the intercompany settlement.

For example, assume that company number 50 has an address book number of 30 and you have not created a cross-reference between the two numbers. One of these situations may occur:

• If address book number 50 exists, the system uses it as the subledger for the intercompany account when you post an intercompany batch, which is not the desired result.
• If address book number 50 does not exist and you attempt to post an intercompany batch, the Post General Journal program generates an error message.

Setting up Ledger Types (P0025)

Select "Create Intercompany Settlements" check box if you want the system to create balancing entries when a transaction that involves multiple companies is entered for a particular ledger type. This check box works in conjunction with the intercompany settlement method on the General Accounting Constants form:

• If this check box is selected, the system validates that entries for this ledger are in balance by company when posted. If companies are out of balance, the system uses the intercompany settlement method to bring them into balance.
• If this check box is selected and the intercompany settlement method is set to 'N' , the system will not post a transaction that involves multiple companies if those companies are out of balance.
• If this check box is not selected, the system will not validate that companies within this ledger are in balance.

Configured Hub Setup

Before you can use configured hubs to settle intercompany transactions, you must set up the configured hub relationships for your organization. The system uses these relationships to process intercompany settlements.

Setup UDC 09/HB

You must set up the name of each configured hub in UDC table 09/HB. Each name can be up to six characters in length. Configured hub names do not have to be actual company names in your organization. For example, set up UDC code AMER to represent a hub for companies in America. The description might be Hub Company Group - America.

Designate Hub/Member Companies (P09190)

For each company that exists in the Company Constants table (F0010), you must designate the company as either the hub company or a member company of the hub in the Configured Hub Companies program (P09190). The system maintains configured hub information in the F09190 table.

* Hub Designator - This flag indicates the status of a company in a user defined hub.

• Enter '1' to specify the hub, or central company of the user defined hub.
• Enter '2' to specify a member company of the user defined hub.

Guidelines for Configured Hubs

It is recommended to observe the following guidelines for configured hubs:

• You can create multiple configured hubs.
• Within a configured hub, you can set up only one hub company, but a hub company is not required. All other non-hub companies within the hub should be set up as member companies. You can assign a company to only one hub.
• If you do not designate each company as either a hub or a member company and post transactions for the company, it throws the error message: Base CO xxxxx Not Found in F09190.
• A hub company can settle with a member company of the same hub or exclusively with other hub companies. An intercompany settlement between two member companies goes through the hub company.
• A member company can settle only with the hub company or another member company of the same hub.

If you do not designate a company as the hub company, observe these guidelines:

• The member companies can settle only with other companies of the same hub.
• When you enter a journal entry, the company that is on the first line of the journal entry becomes the designated hub for that transaction.
• When you are entering vouchers or invoices, the company on the header of the voucher or invoice becomes the designated hub for that transaction.

Intercompany Settlements Methods

Hub Method

Overview

When you choose the hub method, the system creates summarized journal entries for your intercompany settlements by Batch Number and GL Date between a designated hub company and related subsidiary companies.

• The hub method is more commonly used than the detail method.
• You can setup to have only one hub company.
• The system reconciles transactions between subsidiary companies through the hub company.

Examples

Consider the following information used for demonstrating three different examples of how the system creates the automatic entries for intercompany settlements using the hub method:

• The entries to the hub company use a subledger that is equal to the offsetting company number and use subledger type A (address book) so that you have an audit trail.
• The business units (1, 50, 60, and 200) and object account (1291) are determined by AAI items ICCC and ICH.
• The system creates the automatic entries with a document type of AE (automatic entry), a document number equal to the batch number of the journal entry, and a GL date equal to the last day of the accounting period.
• For the journal entries, assume that the business unit on the balance sheet matches the company number.

Example 1: Journal Entry Between Two Companies

This example shows the entries that the system creates when you enter a journal entry between two companies. In this example, company 00200 accrues a liability incurred by company 00050 and accounts for these companies are cleared through the designated hub company 00001. You enter the following information for the journal entry:

When you post the journal entry, the system automatically generates these intercompany entries:

The second and fourth rows are entries to the hub company 00001 from companies 00050 and 00200.

Example 2: Journal Entry Among Three Companies

This example shows the entries that the system creates when you enter a journal entry among three companies. In this example, company 00200 accrues liabilities incurred by companies 00050 and 00060 and accounts for these companies are cleared through the hub company 1. You enter one journal entry that involves more than two accounts, but does not involve the hub company:

When you post the journal entry, the system automatically generates these intercompany entries:

The second, fourth, and six rows are entries to the hub company 00001 from companies 00060, 00050, and 00200. Although the hub company 00001 is not in the original journal entry, all intercompany settlements are cleared through the hub company.

Example 3: Two Journal Entries in One Batch

This example shows how the system creates summarized entries when you enter two journal entries in one batch. In this example, company 00001 transfers cash to company 00060 and prepays an expense on behalf of company 00060. You enter two journal entries in one batch as follows:

When you post the journal entry, the system automatically generates these intercompany entries:

The second row is the entry to the hub company 00001 from company 00060. The hub method summarizes the four lines of the two documents by account and by subledger and subledger type.

Detail Method

Overview

When you choose the detail method, the system creates detailed journal entries by document between companies, using the company on the first line of a transaction as the hub company. More features of detail method are as follows:

• Since there is no designated hub company, the system reconciles transactions between the companies involved.
• When you post entries, the detail method could create more records in the F0911 table than the hub method.
• The detail method is commonly used by companies and government agencies that want or need a detailed audit trail.
• You must use the detail method if you are performing intercompany settlements between companies that have different domestic currencies.

Examples

Consider the following information used for demonstrating three different examples of how the system creates the automatic entries for intercompany settlements using the detail method:

• The entry to the hub company uses a subledger that is equal to the offsetting company number and uses subledger type A (address book) so that you have an audit trail.
• The company on the first line of the journal entry determines the hub company.
• The business units (1, 50, 60, and 200) and object account (1291) are determined by AAI item ICCC.
• The system creates the automatic entries with a document type (AE).
• The automatic entries have the same document number and GL date as the journal entries.
• For the journal entries, assume that the business unit on the balance sheet matches the company number.

Example 1: Journal Entry Between Two Companies

This example shows how the system creates entries when you enter a journal entry between two companies. In this example, company 200 accrues a liability incurred by company 00050. You enter one journal entry with two lines:

When you post the journal entry, the system automatically generates these intercompany entries:

The second is the entry to the hub company 00050 from company 00200.

Example 2: Journal Entry Among Three Companies

This example shows the entries that the system creates when you enter a journal entry among three companies. In this example, company 00200 accrues liabilities incurred by companies 00050 and 00060. You enter one journal entry that involves more than two accounts:

When you post the journal entry, the system automatically generates these intercompany entries:

The second and fourth, rows are entries to the hub company 00050 from companies 00060 and 00200.

Example 3: Two Journal Entries in One Batch

This example shows how the system creates entries when you enter two journal entries in one batch. In this example, company 00001 transfers cash to company 00060 and prepays an expense on behalf of company 00060. You enter two journal entries in one batch as follows:

When you post the journal entry, the system automatically generates these intercompany entries:

The second and fourth rows are entries to the hub (company 1) from company 60. Unlike the hub method, the detail method creates separate entries for each document in the batch.

Configured Hub Method

Overview

Your organization might need to settle transactions across companies in a manner that does not conform to the detail method or the hub method of intercompany settlements. For example, you might have two hub companies in the same environment at the same time. Each hub company would have its own set of companies within its hub. Or, you might need to designate one hub company for certain intercompany settlements and a different hub company for other settlements.

Configured hubs are groups of companies that you can define, or configure, to accommodate intercompany settlements. When you configure a hub, you define the relationships between the companies in the hub. You also designate which company in the hub can settle transactions with other hubs. The designated hub company is the only company that can make intercompany settlements with other hub companies. The system uses your configured hub definitions to ensure that only authorized intercompany settlements occur. The two methods of settlement within the relationship for a configured hub are:

• Modified Hub

All companies in the hub settle only through a single company i.e. designated as the hub company in the hub

• Modified Detail.

All companies in the hub settle through any other company in the hub. A hub company is not designated in this method.

When you use the configured hub method for intercompany settlements, the system validates the user defined intercompany settlement relationships at the document level. The system maintains configured hub information in the Inter/Intra Company Account Relationships table (F09190).

Examples

Consider the following information used for demonstrating two different examples of how the system creates the automatic entries for intercompany settlements using the configured hub method:

• You designate the hub company in the Configured Hub Companies program (P09190).
• The entries use a subledger that is equal to the offsetting company number and use subledger type A (address book) so that you have an audit trail.
• The business units (50, 100, 7) and object account (1291) are determined by AAI item the ICCC.
• The system creates the automatic entries with a document type of AE (automatic entry) and assigns a document number and a GL date that are the same as the journal entry.
• For the journal entries, assume that the business unit on the balance sheet matches the company number.

Example 1: Configured Hub with Hub Company

This example shows how the system creates the entries when you use the configured hub method with a designated hub company (modified hub). In this example, 00050 company is set up as a configured hub in the Intercompany Hub UDC table 09/HB. One member company 00007 accrues a liability incurred by two companies - hub company 00050 and member company 00100. You enter one journal entry involving the three companies:

When you post the entry, the system automatically generates these intercompany entries:

The second and forth rows show the entries to the hub company 00050 from companies 00100 and 00007. The automatic entries are identical to those created using the detail method. However, with configured hubs, the designated hub remains the same regardless of which company is on the first line of the journal entry.

Example 2: Configured Hub without Hub Company

This example shows the entries that the system creates when you have not designated a hub company (modified detail) and all companies are designated as member companies. In this example, one company 00007 accrues a liability incurred by two companies 00050 and 00100.You enter a journal entry that involves three companies:

When you post the entry, the system automatically generates these intercompany entries:

The second and fourth rows show the entries to the hub company 00050 from companies 00100 and 00007. The automatic entries are identical to those that the system creates using configured hubs with a designated hub company. However, the company that is on the first line of the journal entry becomes the designated hub for the transaction.

Error Messages

When you post intercompany settlement entries, you might receive following error messages in the work center due to incorrect intercompany setup: