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R12 : Deferred COGS Accounting (Doc ID 416678.1)

Modified: 12-Jul-2013 Type: BULLETIN Status: PUBLISHED Priority: 3

In this Document

Purpose
Scope
Details

APPLIES TO:

Oracle Cost Management - Version 12.0.0 to 12.1 [Release 12 to 12.1]

Information in this document applies to any platform.
***Checked for relevance on 12-Jul-2013***

PURPOSE

The purpose of the Bulletin is to make the reader aware of the new enhancement of the Deferred COGS account.The enhancement is
applicable for Release 12 onwards.

SCOPE

The bulletin is applicable to Release 12 onwards. The reader is assumed to understand the accounting in the 11i release.

DETAILS

Introduction :

The deferred COGS of goods account is the new feature introduced in Release 12. The basic fundamental behind the enhancement is
that the COGS is now directly matched to the Revenue. The same was not possible till now.

Prior to this enhancement, the value of goods shipped from inventory were expensed to COGS upon ship confirm, despite the fact that
revenue may not yet have been earned on that shipment. With this enhancement, the value of goods shipped from inventory will be put
in a Deferred COGS account. As percentages of Revenue are recognized, a matching percentage of the value of goods shipped from
inventory will be moved from the Deferred COGS account to the COGS account, thus synchronizing
the recognition of revenue and COGS in accordance with the recommendations of generally accepted accounting principles.

The Matching Principle is a fundamental accounting directive that mandates that revenue and its associated cost of goods sold must be
recognized in the same accounting period. This enhancement will automate the matching of Cost of Goods Sold (COGS) for a sales order
line to the revenue that is billed for that sales order line.

The deferral of COGS applies to sales orders of both non-configurable and configurable items (Pick-To-Order and Assemble-To-Order). It
applies to sales orders from the customer facing operating units in the case of drop shipments when the new accounting flow introduced
in 11.5.10 is used. And finally, it also applies to RMAs that references a sales order whose COGS was deferred. Such RMAs will be
accounted using the original sales order cost in such a way that it will maintain the latest known COGS recognition percentage. If RMAs
are tied to a sales order, RMAs will be accounted for such that the distribution of credits between deferred COGS and actual COGS will
maintain the existing proportion that Costing is aware of. If RMAs are not tied to a sales order, there isno deferred COGS.

SETUP and ACCOUNTING :

To set the deferred COGS account.

Inventory -- Setup -- Organization -- Parameters -- Other Accounts

A new account is added which is referred as the Deferred COGS accounts.

Please note that when upgrading from a pre R12 version the DEFERRED_COGS_ACCOUNT will be populated if it is null with the
cost_of_goods_sold_account on the organization parameter. This can then be changed accordingly if a different account is required.

NEW ACCOUNTING :

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Release 12 :

When a Sales order is shipped the following accounting takes place:

Inventory Valuation Account : Credit.

Deferred COGS account : Debit

Once the revenue is recognised, you would need to decide the percentage you wish to recognize the Revenue. A COGS recognition
transaction will be created to reflect a change in the revenue recognition percentage for a sales order line.

The steps to generate such transactions are as follows:

1. Run the Collect Revenue Recognition Information program. This program will collect the change in revenue recognition percentage
based on AR events within the user specified date range.
2. Run the Generate COGS Recognition Events. This program will create the COGS recognition transaction for each sales order line
where there is a mismatch between the latest revenue recognition percentage and the current COGS recognition percentage.

Note that users can choose how often they want to create the COGS Recognition Events.

Navigation to run the COGS recognition request :

- Cost > COGS Recognition > Collect Revenue Recognition Information
- Cost > COGS Recognition > Generate COGS Recognition Events
- Cost > View Transactions > Material Transactions

The distribution for the COGS Recognition transaction associated with the Sales Order transaction now would be as follows:

Deferred COGS : Debit revenue percentage

COGS : Credit (Actual revenue percentage )

Thus, essentially the recognized COGS balance is to move the value from Deferred COGS to COGS.

This particular COGS recognition transaction actually correspond to a revenue recognition percentage change.

You can view the transactions as :

Navigation:
- Cost > View Transactions > Material Transactions > Distributions

A new COGS Revenue Matching Report shows the revenue and COGS information of sales order that fall within the user specified date
range by sales order line

SIMPLER TERMS ( Table level details ) :

Once the whole cycle is complete we will have 2 transactions lines in mtl_material_transactions.

1. Sales Order
2. COGS Recognition transaction

Accounting will be in mtl_transaction_accounts and the Subledger accounting tables as follows:

Transaction 1:
Inventory Valuation Account : Credit. (item_cost)
Deferred COGS account : Debit (item_cost)

Transaction 2:
Deferred COGS : Credit (Actual revenue percentage)
COGS : Debit (Actual revenue percentage )

Still Have Questions?

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My Oracle Support Cost Management EBS Community.

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