With the latest version of E-Business Suite (EBS), Oracle® provides users with increased control by introducing enhanced features and a redesigned legal entity architecture. Previous issues relating to intercompany accounting and financial reporting, caused by redundancy and a cumbersome structure, were addressed by recreating the role of the legal entity in Release 12 (R12). For all intents and purposes, a legal entity is a body responsible for owning assets, paying debts, entering contracts, reporting, paying taxes and complying with all legal requirements pertaining to it.
Essentially acting as a business entity within an enterprise, a legal entity can be composed of one or more business units that operate within a particular region that is governed by certain reporting requirements. Each legal entity established within the ERP represents a real company; for example, a single legal entity may be set up to represent one business unit within a reporting region (i.e., country or province) or it may represent a series of business units operating together within the same region (e.g., Italy, East Coast USA, etc.).
Legal Entity Architecture Developments
In EBS 11i and earlier releases, a legal entity was required by the program’s HR configuration, and it was created by using the Human Resources Management System (HRMS) Organizations form. Each legal entity (LE) was associated with a set of books and assigned a one-to-one relationship with an operating unit (OU). The direct connection between the OU and LE meant that an operating unit acted almost as a surrogate for its legal entity. Not only did such a redundant structure leave the purpose of the legal entity unclear, but it also caused problems with regulatory compliance, accounting and transaction flow whenever the business operations were more complex than a straight, top-down approach.
Release 12 finally addresses this architectural design flaw by breaking apart the rigid coupling between LEs and OUs. Now, legal entities, along with the ledgers and operating units, are created using the Accounting Setup Manager. Each ledger may have one or more legal entities, and there is a direct relationship to one or more Balancing Segment Values (BSVs). The legal entities may be used across many operating units. Since an operating unit is mapped to the ledger, legal entities and operating units do not directly associate, but rather share an indirect connection via the ledger. This frees up the OU to focus on its primary function of managing user access, while the LE remains responsible for regulatory compliance. Another configuration challenge was addressed in R12 by assigning bank accounts to the legal entity instead of as they were previously defined at the operating unit level.
The new legal entity architecture of Release 12 drastically improves flexibility and control over regulatory reporting, as it can better reflect the corporate structure of a company. If a user wants to report on multiple legal entities at once by using a single operating unit, then multiple legal entities can be assigned to the ledger to which the OU is mapped. Moreover, each legal entity and ledger can be configured to best comply with local legal requirements, while operating units can be used to provide users a holistic view of the enterprise’s performance. Another added benefit of R12’s structure is the ease at which intercompany accounting can be completed. Because the legal entity is directly assigned a BSV, transactions among legal entities can be easily tracked and balanced within the ledger. Also, thanks to SLA functionality, a user can account for single legal entity or a group of them, and even just a part of an entity if necessary.
Realizing the Benefits
Although improvements arise in each new release of EBS, an upgrade alone will not guarantee that the user will realize the complete potential of the system. Whether still operating in 11i or already in R12, if a business hopes to take full advantage of the new structure and features, the existing instance’s configuration and data quality needs to be evaluated.
Data silos and redundancies must be addressed directly, as these issues will persist despite the new configurations. Moreover, if an instance has been in use for several years, then the charts of accounts should also be reevaluated for how well they reflect the current state of the enterprise.
Oracle’s latest E-Business Suite Release 12 provides users with more functionality and ease of use thanks to its redesigned legal entity architecture. Not only does it break up the redundancy of the one-to-one setup between legal entities, ledgers and operating units, but by doing so it also improves regulatory reporting and intercompany accounting. Finally, when shifting to the new R12 model for legal entities, a business should reevaluate its existing data and setups in order to assure optimum functionality.