Deferred COGS: How to use this feature of Oracle Apps R12

Finally a relief for all the accounting users who had problems working with oracle apps due to period mismatch of revenue and cost recognition. Generally the orders which are shipped on the last day of month have this issue. As most of you know that till release 11i, the value of good shipped is expensed to COGS when the material in ship confirmed in shipping and revenue will get recognized after the invoices are generated in AR and revenue recognition is done. The problem that accountants face with this design is that on the last day of month COGS gets recognized when we ship confirm the material but invoice gets generated in next month and so revenue gets recognized in different month. This does not look good from the matching principle which requires the revenue and cost should get recognized in the same period.

The deferred COGS account is the new feature introduced in Release 12. The key fundamental behind the feature is that the COGS is now directly matched to the Revenue. In simple terms, this means, COGS for an order line will be recognized only if the revenue is recognized for that line making sure that the revenue and COGS are posted in the same month. Matching percentage is also taken care which ensures that revenue and cost are always in sync.

Setup: Only one key setup involved for this functionality is to define the Defer COGS account.
Navigation: Inventory à Setup à Organization à Parameters à Other Accounts

Business Process:

In R11i When a Sales order is shipped and interface trip stop is completed. This make a call to COGS workflow to generate the COGS account. This then generate following accounting.

Cr                    Inventory Valuation account $250
          Dr         COGS Account                                 $250

In R12 when a sales order is shipped and interface trip stop is completed the following accounting entries gets generated.

Cr                    Inventory Valuation account           $250
           Dr         Deferred COGS Account                            $250

After the AR invoice is generated and the revenue is recognised (Considering you don’t have revenue recognition policies or specific accounting rules), following program will create COGS recognition transaction. This will reflect a change in the revenue recognition percentage for a sales order line.

1. 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. It collects invoice information of the sale order line from RA_CUST_TRX_LINES_ALL and RA_CUST_TRX_LINE_GL_DIST_ALL after the revenue is recognized and check the percentage revenue recognized. It then insert information in CST_REVENUE_RECOGNITION_LINE.

 Navigation: Cost > COGS Recognition > Collect Revenue Recognition Information

 2. 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. This is the program which also makes the transactions costed by creating these accounting entries. So cost manager is not used to make these transactions as costed in R12.The COGS account in this entry is taken from the distribution_account in mtl_material_transactions table (which was generated earlier by COGS workflow).

  Cr                   Deferred account                       $250 (Actual Revenue %)
            Dr         COGS Account                           $250 (Actual Revenue %)

Navigation: Cost > COGS Recognition > Generate COGS Recognition Events

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

As we have seen above this new feature does help in resolving some of the key accounting issues but we need to be aware of the following also

1.  With this feature the COGS recognition now requires few extra concurrent requests to be submitted.
2. AR revenue need to be recognized to have COGS recognized
3. This functionality is not optional as it is mandatory to be used in R12
4. To make the complete set of transactions visible in the Material Transaction screen, ‘Include Logical Transaction’ checkbox need to be checked.

This concludes our discussion about Deferred COGS.  Now I am planning to pick some topic from procurement as we have not touched that area till date.