Inter-Company Transactions, Counter Documents and Transfer Pricing
The purpose of this page is to help you understand your options for inter-company and transfer pricing transactions. It demonstrates the different options including Counter Documents, an iDempiere tool to help automate the creation of opposing intra-org documents.
2014-08-14 AM Inter-Company Transaction and Counter Documents
Introduction
0:01:00 Difference between Client and Organization (Org)
0:02:30 Transferring product, money and revenues/expenses between organization
0:03:00 Inter-Company transactions within a single document (diagram)
0:05:00 Tangent - suspense accounting
0:05:30 Setting Suspense Balancing and Inter-Company Due From and Due To settings
0:06:30 How the system calculates Inter-Company Due From and Due To amounts
0:08:00 Perform an example of inter-company transaction using an Inventory Move
0:11:30 Perform an example of inter-company transaction where you pay/receive money in a bank from one Organization for an Invoice from another Organization.
0:16:15 Arm's length transaction - recognize revenue and loss associated with moving inventory.
0:17:30 Perform an example of inter-company transaction using a GL Journal to represent product movement revenue and expense.
0:21:15 Perform an example of inter-company transaction using an Invoice instead of a GL Journal
0:25:45 How to remove "Allow Negative Postings"
0:26:30 Why use an Invoice instead of a GL Journal - to write to all Accounting Schemas simultaneously (with an Invoice).
0:27:45 Counter Document introduction
0:28:00 Example of why use Counter Documents - need real/formal Invoice to file for GST Tax reclamation.
0:30:00 Description of Counter Documents
0:31:30 Outstanding issue with Counter Documents relating to consolidation
0:34:30 Outstanding issue with Counter Documents relating to Shipment <-> Material Receipt timing
IMPORTANT NOTE: I miss spoke about which transaction should be re-classed to inter-comany Revenue and COGS. What should happen is the inter-company sell side (both COGS and Revenue) should go to inter-company accounts. Nothing from the sell to the customer should change. This is better described in the consolidation section.
Counter Document - Introduction
Counter Document Step 1 - Link Business Partners to Organizations
Inter-Company Transactions and Transfer Pricing at Consolidation
Inter-company transactions are the documents that move value between two related Organizations. Counter Documents are a way to automate one form of inter-company transactions. Using a single Inventory Move between two different Organizations is another example of an inter-company transaction. Transfer pricing is the setting of price (and therefore profit) between related Organizations.
I have been exposed to four general types of inter-company and transfer pricing scenarios:
Promotional - promotional transfer pricing occurs when an Organization (Org A) owns or is related to another Organization (Org B) where Org B's operations are very limited and work to promote the business of Org A. Let's say Org A is a corporate headquarters located in the US. Org B is a sales office in Mexico. Org B might operate with a "cost plus" profit model. An example of cost plus is where Org B incurs $100K USD of expenses in a financial period. Org B would then create an AR invoice for $100 plus some percentage (say $110K) to Org A as a means to fund the following months operating budget.
Services - service transfer pricing occurs when one Organization perform service on behalf of another Organization. If you are global distributor, you might have one Organization (Org A) warehousing inventory for another related Organization (Org B). In this case, Org A would create an AR Invoice to Org B for the services performed.
Inventory - inventory transfer pricing occurs when one Organization (Org A) moves inventory (of value) to another Organization (Org B). This transaction is supported in a traditional PO-SO, MR-Ship, AP Inv-AR Inv document paring as demonstrated in the Counter Document demonstration.
Management - management transfer pricing occurs when one Organization (Org A) maintains personnel that are shared/used by another Organization (Org B). In this case, Org A would create an AR Invoice to Org B for the appropriate percentage of personnel consumed by Org B.
In all the above example, cash clears the liabilities. There are no balances left in an Inter-Company Due To and Due From accounts.
With transfer pricing, you might create 9-series GL accounts (bottom of the P&L) to record your transfer pricing revenues and expenses. For example:
Promotional Transfer Pricing Revenue
Promotional Transfer Pricing Expense
Services Transfer Pricing Revenue
Services Transfer Pricing Expense
Inventory Transfer Pricing Revenue
Inventory Transfer Pricing Expense
Management Transfer Pricing Revenue
Management Transfer Pricing Expense
Promotional Accounting Dr/Cr Details
At the end of a given fiscal period per the Promotional transfer pricing example listed above, Org B (promotional entity) creates an AR Invoice to Org A (headquarters). This invoice debits the Receivables account and credits the Promotional Transfer Pricing Revenue account. Org A creates an AP Invoice from Org B. This invoice debits the Promotional Transfer Pricing Expense account and credits the Payables account. Payments and Receipts are made to relieve the Payables and Receivables with cash.
Service Accounting Dr/Cr Details
At the end of a given fiscal period per the Service transfer pricing example listed above, Org A creates a service AR Invoice for storing product for Org B. This invoice debits the Receivables account and credits the Service Transfer Pricing Revenue account. Org B creates an AP Invoice from Org A. This invoice debits the Service Transfer Pricing Expense account and credits the Payables account. Payments and Receipts are made to relieve the Payables and Receivables with cash.
Inventory Accounting Dr/Cr Details
Inventory Transfer Pricing is be far the most interesting of the transfer pricing examples for the following reasons:
It touches the Balance Sheet beyond simple cash transactions.
It involves Vendor and Customer transactions.
The lifespan of a transaction (Org A buys from vendor and stores product, Org A sells to Org B and Org B stores product, and Org B sells to customer) can be very long. Therefore, the level of accounting math depends on the needs of your company.
The concept of buying and selling products between related organizations creates an issue at the time of consolidating financials. The issue is that either Inventory or COGS and Revenue become overstated depending on when you perform consolidation. Here is an example to illustrate the issue:
Org A buys a product with qty=100 at $1. As a result, Org A credits Cash and debits Inventory by $100.
Org A sells all the product to Org B at $1.05.
Org A debits COGS and credits Inventory by $100.
Org A debits Inventory credits Cash by $105.
If you where to perform consolidation at this point, the global inventory valuation would be over stated by $5 (by most people's standard). If you were to reclass the previous Revenue and COGS entries as follows, you could use the resulting Inventory Transfer Pricing Profit (revenue - expense) to logically offset the overstated inventory. The reclass would look like this:
Debit Inventory Transfer Pricing Expense and credit COGS by $100
Debit Revenue and credit Inventory Transfer Pricing Revenue by $105
Org B sells qty=50 to a customer at $2. As a result, Org B debits COGS and credits Inventory by $52.50 and it debits Receivables and credits Revenue by $100.
If you where to perform consolidation at this point, the global inventory valuation would be over stated by $2.50 and Gross Profit would be under stated by $2.50 (by most people's standard). The question is "Do you take the time to divvy up the $5 of Inventory Transfer Pricing Profit (revenue - expense) to the over stated Inventory and under stated Gross Profit?". If it is me, the answer is "not unless someone tells me I really have to".
Org B sells the remaining qty=50 to a customer at $3. As a result, Org B debits COGS and credits Inventory by $52.50 and it debits Receivables and credits Revenue by $150.
If you where to perform consolidation at this point, the global Gross Profit would be under stated by $5; however, net earnings is true because the net takes into account the Inventory Transfer Pricing Profit (revenue - expense).
Management Accounting Dr/Cr Details
At the end of a given fiscal period per the Management transfer pricing example listed above, Org A creates a management AR Invoice for personnel resources consumed by Org B. This invoice debits the Receivables account and credits the Management Transfer Pricing Revenue account. Org B creates an AP Invoice from Org A. This invoice debits the Management Transfer Pricing Expense account and credits the Payables account. Payments and Receipts are made to relieve the Payables and Receivables with cash.