Executive summary
In this era of complex business models, numerous factors contribute to organization’s success. Accuracy and correctness of recording financial information, which can be analyzed over a period, plays a pivotal role. There are number of challenges in recording financial information, one such challenge being accurate recording of Payables invoices liability information and the corresponding payments information.
To address the above challenges, Oracle Cloud Financials provides two key features that give clients a high level of flexibility, while at the same time help ensure accuracy of the information:
Automatic Offsets
Automatic Offsets was created for the government and higher education sectors where it is mandated by law that transactions be balanced to the balancing segment level. This concept can also be applied to the Hospitality industry, where different reserve entities (entities that are created for different type of funds used in maintenance of main property. Ex – painting fund, interior fund, recreation fund etc.) associated with different balancing segment entities belong to a single property. It helps track the liability and cash at the balancing segment level. If invoices are entered for expense or asset purchases for more than one balancing segment, Automatic Offsets functionality can be used to keep Payables transaction entries balanced at the balancing segment level by allocating the liability, discount taken and gain/ loss across balancing segments. For an invoice, Payables creates offsetting liability distributions to keep the accounts balanced at the balancing segment level. This feature will prevent generation of intercompany journal entries for payables invoices in General Ledger.
Pooled Bank Accounts –
Pooled bank accounts are bank accounts that cater to multiple entities. In continuation to above example of the Hospitality industry where different reserve entities associated with different balancing segment entities belong to a single property, a single bank account will cater to all the different entities that belong to a single property. On enabling the pooled account functionality (in conjunction with automatic offset); for a payment, Payables create offsetting cash clearing/ cash distributions to keep the accounts balanced at the balancing segment level. This feature will prevent generation of intercompany journal entries for payables payments in General Ledger.
In this Functional Point of View, we would be discussing about functionalities of Automatic Offsets and Pooled Bank Accounts. We will also discuss about following things:
1. Purpose of Automatic Offsets and Pooled Bank Accounts.
2. Alternate approach to enabling automatic offsets – Intercompany entries in General Ledger.
3. Setups to be performed in Oracle Cloud.
4. Worked example for Automatic Offsets and Pooled Bank Accounts.
In this Functional Point of View, we will also provide step by step screenshot for all setups along with their uses and examples which will aid in understanding of the business processes.
Introduction
Oracle Cloud Financials provides following two key features to help clients record, maintain and track the liability and cash balances at the balancing segment level
Automatic Offsets
1. On entering invoices for expense or asset purchases with more than one “primary balancing segment value”, automatic offsets will create corresponding liability distributions for each “primary balancing segment value”.
2. There are 2 methods of creating automatic offsets –
a. Primary balancing segment – This method builds the liability lines by picking primary balancing segment values from charge distributions and other segment values from default liability distribution on the invoice header.
b. All segments, except natural account – This method builds the liability lines by picking all segment values other than natural account segment value from charge distributions and natural account segment value from default liability distribution on the invoice header.
3. Amounts are automatically allocated for the following invoice entries –
a. Conversion rate variance gain or loss
b. Liability
c. Nonrecoverable tax for invoices matched to purchase orders
d. Nonrecoverable tax for invoices not matched to purchase orders, where no tax expense account has been defined for the tax rate
e. Withholding tax, if the withheld amount is applied at invoice validation time.
Pooled Bank Accounts
1. On enabling Automatic Offsets, we can choose to pool any or all of the bank accounts.
2. The cash in a pooled bank account is shared by multiple balancing segments whereas the cash in a non-pooled bank accounts is associated with a single balancing segment.
3. Pooled bank accounts functionality will only work if Automatic Offsets is enabled. In other words, where Automatic Offsets is not enabled, we can only have non-pooled bank accounts.
4. Amounts are automatically allocated for the following payment entries –
a. Cash, if pooled account is enabled
b. Cash clearing, if pooled account is enabled and if we account for payments at clearing time
c. Discount
d. Realized gain or loss
e. Bills payable
f. Withholding tax, if amounts are withheld at payment time.
Problem definition
Following challenges are addressed by Automatic Offsets and Pooled Bank Accounts features in Oracle Cloud –
1. Laws of certain countries require to have balance sheets balanced by balancing segment.
2. Some companies need the flexibility to opt for having self-balancing set of accounts. Ex – if ‘Product’ is a segment in the Chart of Accounts, Automatic Offsets and Pooled Bank Account would allow to track AP liability and Cash by product.
3. Different elements in invoices and payments need to be allocated across balancing segments automatically.
4. Preventing generation of inter-company journal entries in General Ledger.
5. To eliminate manual user intervention and provides increased operational efficiency.
6. To provide reduced overhead costs and maintenance by maintaining lesser number of bank accounts that can cater to multiple balancing segments.
High-level solution
This Functional Point of View is targeted at companies which are required to present their Payables and payment transactions balanced at the balancing segment level.
Automatic Offsets –
· Automatic Offsets are enabled at Business Unit level.
· On enabling this feature, balancing segment values from charge accounts are copied over to liability lines resulting in 1-1 mapping of balancing segments.
· Automatic Offsets can be enabled in two ways – ‘Primary Balancing Segment level’ (or) ‘All segments except natural account’.
· It prevents generation of Intercompany lines between different balancing segments at invoice level.
Pooled Bank Accounts –
· Pooled Bank Accounts are enabled at Bank account level.
· On enabling this feature, balancing segment values from liability lines are copied over to cash/ cash clearing lines resulting in 1-1 mapping of balancing segments.
· Pooled bank accounts feature works only when Automatic Offsets are enabled.
· It prevents generation of inter-company lines between different balancing segments at payment level.
Process Flow –
Accounting Flow –
Before enabling Automatic Offsets:
Solution details
Recording transactions with Automatic Offsets and Pooled Bank accounts involves following steps –
1. Enable Automatic Offset at Business Unit level
2. Enable Pooled Bank account at bank account setup level
3. Create and account payables invoices and payments for following scenarios –
a. No Automatic Offset enabled with no pooled bank account
b. Automatic Offset enabled with option ‘Primary Balancing Segment level’ with pooled bank account enabled
c. Automatic Offset enabled with option ‘All segments except natural account’ with pooled bank account enabled
1. Enable Automatic Offset at Business Unit level:
Automatic Offset needs to be enabled at Business Unit level under setup task ‘Manage Common Options for Payables and Procurement’.
2. Enable Pooled Bank account at bank account setup level:
Pooled account option is enabled at bank account level under setup task ‘Manage Bank Accounts’.
3. Create and account Payables invoices and payments for following scenarios –
a. No Automatic Offset enabled with no pooled bank account:
Select the Automatic Offset Segments as ‘None’ at Business Unit level under setup task ‘Manage Common Options for Payables and Procurement’.
Create an Payables invoice with multiple charge distributions having different primary balancing segment values than the default liability distribution.
Account for the payables invoice. It generates Intracompany balancing lines automatically since the primary balancing segment values belong to the same legal entity.
Uncheck ‘Pooled account’ option at bank account level under setup task ‘Manage Bank Accounts’.
Pay the invoice.
Account for the payment. It generates intracompany balancing lines automatically since at the bank account setup level the primary balancing segment value on the Cash clearing account is different than the liability distribution and both the balancing segment values belong to the same legal entity.
b. Automatic Offset enabled with option ‘Primary Balancing Segment level’ with pooled bank account enabled:
Select the Automatic Offset Segments as ‘Primary Balancing Segment’ at Business Unit level under setup task ‘Manage Common Options for Payables and Procurement’.
Create an Payables invoice with multiple charge distributions having different primary balancing segment values than the default liability distribution.
Account for the payables invoice. It builds the liability lines by picking primary balancing segment values from charge distributions and other segment values from default liability distribution on the invoice header.
Check ‘Pooled account’ option at bank account level under setup task ‘Manage Bank Accounts’.
Pay the invoice.
Account for the payment. It builds the Cash clearing lines by picking primary balancing segment values from liability distributions and other segment values from default Cash clearing account setup at bank account level.
c. Automatic Offset enabled with option ‘All segments except natural account’ with pooled bank account enabled:
Select the Automatic Offset Segments as ‘All segments, except natural account’ at Business Unit level under setup task ‘Manage Common Options for Payables and Procurement’.
Create an Payables invoice with multiple charge distributions having different primary balancing segment values than the default liability distribution.
Account for the payables invoice. It builds the liability lines by picking all segment values other than natural account segment value from charge distributions and natural account segment value from default liability distribution on the invoice header.
Check ‘Pooled account’ option at bank account level under setup task ‘Manage Bank Accounts’.
Pay the invoice.
Account for the payment. It builds the Cash clearing lines by picking all segment values other than natural account segment value from liability distributions and natural account segment value from default Cash clearing account setup at bank account level.
Business benefits
Following are some of the major benefits of Automatic Offsets and Pooled Bank Accounts features in Oracle Cloud –
1. Eliminates manual user intervention and provides increased operational efficiency.
2. Helps Government, education and not-for-profit organizations to account for funds, which are sets of self balancing accounts including assets, liabilities, equity, revenues and expenditures as appropriate.
3. Facilitates accurate fund accounting for organizations that create transactions crossing funds.
4. Provides reduced overhead costs and maintenance by maintaining lesser number of bank accounts that can cater to multiple balancing segments.
5. Automatic Offsets and Pooled bank accounts features allocates different elements in invoices and payments automatically across balancing segments.
Conclusion
Automatic Offsets and Pooled Bank account features play a vital role in accurate recording of payables invoice and payment information for companies requiring to present their payables transactions to be balanced at balancing segment levels without using intercompany journals. Many organizations have started using pooled bank accounts to cater to multiple entities within their group. Hence it is imperative that the payment information has to be recorded appropriately.
By discussing step by step setups to be performed with screenshots this Functional Point of View can be used by any professionals across various projects.