Oracle Applications White Paper

WHITE PAPER ON TAX VARIANCE

CALCULATION FOR PO MATCHED INVOICE
Author: Meha Agrawal ,Rupali Ghosh
and Asharani K
Reviewed By: Purvi Purswani
Creation Date: May 9,2017
Version: 1.0
Status: FINAL
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 2

Contents
OBJECTIVE:..................................................................................................................................................................3
SCOPE OF THE DOCUMENT:.....................................................................................................................................3
This paper will cover:.................................................................................................................................................3
This Paper will not cover............................................................................................................................................3
TERMS USED:...............................................................................................................................................................3
PRE-REQUISITE (TAX) SETUPS:...............................................................................................................................3
TEST CASES OVERVIEW:.........................................................................................................................................11
TEST CASE FLOW.....................................................................................................................................................12
REFERENCE................................................................................................................................................................50
CONCLUSION.............................................................................................................................................................50
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 3

OBJECTIVE:
This whitepaper provides step by step guide to create Tax rate Variance (TRV), Tax exchange rate variance (TERV)
and Tax invoice price variance (TIPV) lines for PO matched invoice. The paper also provides a clarification of
accounting line generation and setup of account derivation rule.

SCOPE OF THE DOCUMENT:

This paper will cover:
 Regime to rate flow for one Test case.
 Step by step guide to create TRV, TERV, and TIPV
 Calculation of TRV, TERV and TIPV
 Account generation of TRV, TERV and TIPV
 Subledger accounting setup for TRV, TERV and TIPV line

This Paper will not cover

 Detailed explanation of regime to rate flow
 Explanation of sub ledger accounting method
 Detailed explanation of PO and Invoice creation.

TERMS USED:
 Tax rate Variance (TRV): Tax Rate Variance reflects the tax variance between the invoice and the PO
distributions due to difference in tax applicability. Tax Rate Variance is normally computed for the Non
recoverable portion of the Tax
 Tax exchange rate variance (TERV): Tax Variance between invoice and PO distributions due to exchange
rate variance.
 Tax invoice price variance (TIPV): Tax Variance between invoice and PO distributions due to Unit Price
variance.
 Journal Line Definition - JLD
 Journal Line Type – JLT
 Subledger Accounting Method - SLAM

PRE-REQUISITE (TAX) SETUPS:

STEP 1: Create a regime code
Navigation: Tax Manager > Tax configuration >Tax Regime
Tax Regime Code: AP_PO_TAX_REGIME
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TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 5

STEP 2: Create Tax

Navigation: Tax Manager > Tax configuration >Taxes
Tax: PO_TAX

NOTE: Once regime to rate flow is completed enable the check box

Similarly Create Tax: AP_TAX

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STEP 3: Create Tax Status

Navigation: Tax Manager > Tax configuration >Tax statuses
Tax status: PO_TAX_STATUS

Similarly Create Tax status: AP_TAX_STATUS

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STEP 4: Create Tax Jurisdiction

Navigation: Tax Manager > Tax configuration >Tax Jurisdictions

Tax Jurisdiction code: PO_TAX_JURISDICTION

Similarly create Tax Jurisdiction code: AP_TAX_JURISDICTION

STEP 5: Create Tax rate

Navigation: Tax Manager > Tax configuration >Tax rate

Tax Rate: PO_TAX_RATE

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Similarly create Tax Rate: AP_TAX_RATE

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STEP 6: Create Tax rules

Navigation: Tax Manager > Tax configuration >Tax rules
Tax Rule for PO_TAX

Tax Rule for AP_TAX

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STEP 7: Create Configuration owner tax options

NAVIGATION: Tax manager > Defaults and controls > Configuration owner tax options

Note: PO taxes will be copied although the "Enforce Tax from Reference Documents" is unselected. If Enforce Tax
from Reference Document is set to Yes- Tax engine picks the Regime, Tax and copy the Status, Rate code, Rate %
(It does not do rate determination).
If it is not set, Engine picks the Regime, Tax from PO and do the determination for Status, Rate Code, Rate %
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 11

TEST CASES OVERVIEW:

For Below Test cases following tax details are used:-

Note: Taxes Used are non recoverable tax and non inclusive

Case 1:
Create a PO matched Invoice with same tax rate code in PO and AP.(No TRV, TERV and TPV generated )

Case 2:
Create an Expense type PO matched Invoice with different tax rate code in PO and AP (TRV) generated.
i) PO with accrue at receipt un-checked.
ii) PO with accrue at receipt checked.

Case 3:
Create an Inventory type PO matched Invoice with different tax rate code in PO and AP (TRV) generated.

Case 4:
Create an expense type PO matched Invoice with different exchange rate and same tax rate code in PO and AP
(TERV generated)
i) PO with accrue at receipt un-checked
ii) PO with accrue at receipt checked.

Case 5:
Create an inventory type PO matched Invoice with different exchange rate and same tax rate code in PO and AP
(TERV generated)

Case 6:
Create an Expense type PO matched Invoice with different unit price and same tax rate code in PO and AP (TIPV
generated)
i) PO with accrue at receipt un-checked
ii) PO with accrue at receipt checked

Case 7:
Create an inventory type PO matched Invoice with different unit price and same tax rate code in PO and AP (TIPV
generated)
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 12

TEST CASE FLOW

Case1: Create a PO matched Invoice with same tax rate code in PO and AP(No TRV, TERV and
TPV generated ).
STEP 1: Create a PO
NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders

NOTE: Accrue at receipt is unchecked

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NOTE: Destination type is expense.

STEP 2: Calculate Tax in PO

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders >Actions >Manage Tax
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STEP 3: Create a PO matched Invoice

NAVIGATION: Payables Super User > Invoices: Entry > Invoices

NOTE: PO tax rate is copied to AP invoice

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NOTE: AP and PO tax rates are same hence no TRV generated

STEP 4: View Accounting Entry
NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting

NOTE: Since it is expense type PO, PO Charge account gets defaulted from PO to AP for item expense line and
NON RECOVERABLE TAX line takes the account from item expense line

Case 2: Create an Expense type PO matched Invoice with different tax rate code in PO and AP
(TRV) generated.

i) PO with accrue at receipt un-checked

STEP 1: Create a PO
NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders
NOTE: Accrue at receipt is unchecked and Destination type is expense.

STEP 2: Calculate Tax in PO

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NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders >Actions >Manage Tax

STEP 3: Create a PO matched Invoice

NAVIGATION: Payables Super User > Invoices: Entry > Invoices

NOTE: Tax which gets defaulted from PO is PO_TAX_RATE. Override the PO_TAX_RATE to AP_TAX_RATE.

STEP 4: Tax Calculation Details

NAVIGATION: Payables Super User > Invoices: Entry > Invoices >Tax Details
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NOTE: PO_TAX_RATE calculated is 0, AP_TAX_RATE calculated is 1

STEP 5: Review Invoice distribution details after invoice validation

NOTE: Since AP_TAX_RATE code is not present in PO, hence the difference in tax rate code is determined by line
type code in AP as TAX RATE VARIANCE
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NOTE: Since PO_TAX_RATE code is not present in AP, hence the difference in tax rate code is determined by line
type code in AP as TAX RATE VARIANCE.

STEP 6: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting

NOTE: For Expense type PO with accrue at receipt unchecked,Non Recoverable tax and TRV lines accounts are
same, hence ‘Accounting class codes’ are merged for non recoverable tax and TRV lines.
For Example: In the above scenario distribution created for amount 1 is having line type code as Tax Rate Variance
(TRV) but while accounting the transactions, ‘Accounting class code’ considered as ‘Non-Recoverable tax ‘.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 19

STEP 7 : Journal Line Type Setup for Tax Rate Variance in Standard Accrual (Subledger Accounting Method)
Navigation: Payables> Setup>Subledger Accounting Setup> Accounting Methods Builder > Methods and
Definitions> Journal Line Definition

Note: The TRV JLT will be triggered when conditions mentioned in above screen shot is met. In above case ‘Accrue
on receipt’ option is equal to ‘NO’; Hence TRV was not triggered and merged with Non Rec Tax line.

Case 2: Create an Expense type PO matched Invoice with different tax rate code in PO and AP
(TRV) generated.
ii) PO with accrue at receipt checked
STEP 1: Create a PO
NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders
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NOTE: Accrue at receipt is checked and Destination type is expense.

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TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 22

STEP 2: Calculate Tax in PO

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders >Actions >Manage Tax

STEP 3: Create a PO matched Invoice

NAVIGATION: Payables Super User > Invoices: Entry > Invoices
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 23

NOTE: Item Line account populated is PO accrual account for PO matched invoice with accrue @ receipt checked

NOTE: Tax Rate Variance account populated is PO Charge account for PO matched invoice where accrue @ receipt
is checked
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 24

NOTE: In this case the non rec account is different from the TRV account .This is because the non rec account is
defaulted from item line which is PO accrual account and TRV account is defaulted as PO charge account.

STEP 4: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 25

Case 3:
Create an Inventory type PO matched Invoice with different tax rate code in PO and AP (TRV)
generated

STEP 1: Create a PO
NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders

NOTE: For inventory type PO select an inventory item

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 26
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 27

STEP 2: Calculate Tax in PO

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders >Actions >Manage Tax

STEP 3: Create a PO matched Invoice

NAVIGATION: Payables Super User > Invoices: Entry > Invoices
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 28

NOTE: TRV account is taken as PO variance account

(Screen shot of PO variance account is shown above) for PO matched invoice of destination type inventory

STEP 4: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 29

Case 4:
Create an expense type PO matched Invoice with different exchange rate and same tax rate code in
PO and AP (TERV generated)

i) PO with accrue at receipt un-checked

STEP 1: Create a PO
NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 30

Note : Ledger currency is USD, PO Currency is INR and Conversion rate is 55.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 31

STEP 2: Calculate Tax in PO

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders >Actions >Manage Tax
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 32

STEP 3: Create a PO matched Invoice

NAVIGATION: Payables Super User > Invoices: Entry > Invoices

Note : Invoice Exchange rate taken was 50.

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 33

Note : For TERV lines , invoice distribution amount will be zero and functional amount will be populated as a
difference between AP and PO exchange rate.
TERV = (Invoice Exchange rate – PO Exchange rate)*Invoice tax amount.
For above case TERV= (50-55)*0.5 = -2.5
TERV account = PO Charge account.

STEP 4: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting

NOTE: For Expense type PO with accrue at receipt unchecked, CCID for non recoverable tax and TERV lines are
same. Hence ‘Accounting class codes’ are merged for non recoverable tax and TERV lines.
For Example: In the above scenario distribution base amount 2.5 is having line type code as TERV. But while
accounting the transactions, ‘Accounting class code’ is considered as ‘Non-Recoverable tax‘.
For TERV line, Invoice distribution amount is zero and base amount (functional) is 2.5. Hence while accounting
entered amount is zero, whereas accounted amount is populated as 2.5.

STEP 5: Journal Line Type Setup for Tax Exchange Rate Variance in Standard Accrual (Subledger Accounting
Method)
Navigation: Payables> Setup>Subledger Accounting Setup> Accounting Methods Builder > Methods and
Definitions> Journal Line Definition
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 34

Note: The TERV JLT will be triggered when conditions mentioned in above screen shot is met. In above case
‘Accrue on receipt’ option is equal to ‘NO’ , Hence TERV was not triggered and merged with Non Rec Tax line.

Case 4:
Create an expense type PO matched Invoice with different exchange rate and same tax rate code in
PO and AP (TERV generated)

ii) PO with accrue at receipt checked

STEP 1: Create a PO with ‘Accrue at receipt’ checked and calculate Tax.
Steps to create PO are same as mentioned above.
PO Charge account 01-110-7699-0000-000
PO Accrual Account 01-000-2220-0000-000

STEP 2 : Create a PO matched Invoice and review distribution.

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 35

Note: Account for TERV line is PO Charge account (01-110-7699-0000-000)

STEP 3: View Accounting Entry

Note: For PO matched invoice with ‘Accrue at Receipt’ checked accounting class code generated is TERV.

STEP 4: Account Derivation Rule Setup for Tax Exchange Rate Variance in Standard Accrual (Subledger
Accounting Method)
Navigation: Payables> Setup>Subledger Accounting Setup> Accounting Methods Builder > Methods and
Definitions> Journal Line Definitions
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 36
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 37

Note: When ‘Accrue on Receipt’ option is checked, the source for TERV account is ‘Purchase Order Variance
account’

Case 5:
Create an inventory type PO matched Invoice with different exchange rate and same tax rate code
in PO and AP (TERV generated)

STEP 1: Create an Inventory PO and calculate Tax

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders

Note: By default for Inventory type PO ‘Accrue on Receipt’ is checked.

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 38
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 39

STEP 2 : Create a PO matched Invoice and calculate Tax

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 40

Note: At the time of invoice validation TERV account is defaulted from PO Accrual account. But at the time of
accounting TERV account is derived based on account derivation rule set in SLAM

STEP 3 : View Accounting Entry

STEP 4: Account Derivation Rule Setup for Tax Exchange Rate Variance in Standard Accrual (Subledger
Accounting Method)
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 41

Navigation: Payables> Setup>Subledger Accounting Setup> Accounting Methods Builder > Methods and
Definitions> Journal Line Definitions

Note: The Source for TERV line is ‘Purchase Order Rate variance’ when PO destination type is inventory. When
functional amount for TERV line is greater than zero, then ‘PO Rate Gain Variance’ account is used, else ‘PO Rate
Loss Variance’ account is used.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 42

Setup for ‘PO Rate Gain /Loss Variance’ account:

Navigation: Payables>Setup>Options>Financial Options

CASE 6: Create an Expense type PO matched Invoice with different unit price and same tax rate
code in PO and AP (TIPV generated)

i) PO with accrue at receipt un-checked

STEP 1: Create a PO with ‘Accrue on Receipt’ unchecked and calculate tax.

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 43

Note: Unit Price in PO is 10 USD.

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 44

STEP 2: Create a PO matched Invoice and validate

NAVIGATION: Payables Super User > Invoices: Entry > Invoices

Note: TIPV account is defaulted as ‘PO Charge account’.

TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 45

TIPV = (Invoice Unit Price-PO Unit Price) * Tax Amount

In above Case TIPV = (5-10)*0.5 = -0.25

STEP 3: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting

NOTE: For Expense type PO with accrue at receipt unchecked; non recoverable tax and TIPV lines accounts are
same. Hence ‘Accounting class codes’ are merged for non recoverable tax and TIPV lines.
For Example: In above scenario, distribution is created for amount 0.25 and has line type code as TIPV. While
accounting the transaction ‘accounting class code’ is considered as ‘Non-Recoverable tax‘.

STEP 7: Journal Line Type Setup for Tax Rate Variance in Standard Accrual (Subledger Accounting Method)
Navigation: Payables> Setup>Subledger Accounting Setup> Accounting Methods Builder > Methods and
Definitions> Journal Line Definition
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 46

Note: TIPV JLT will be triggered when conditions mentioned in above screen shot is met.
Here ‘Accrue on receipt’ option is equal to ‘NO’. So, TIPV was not triggered and merged with non rec tax line.

ii) PO with accrue at receipt checked

STEP 1: Create a PO with ‘Accrue on Receipt’ checked and calculate tax.

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 47

STEP 2: Create a PO matched Invoice and validate

NAVIGATION: Payables Super User > Invoices: Entry > Invoices

NOTE: For PO with destination type as ‘Expense’ and ‘Accrue on Receipt’ checked, TIPV account is defaulted from
PO Charge account.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 48

STEP 3: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting

STEP 4: Account derivation rule for TIPV in Standard Accrual (Subledger Accounting Method)
Navigation: Payables> Setup>Subledger Accounting Setup> Accounting Methods Builder > Methods and
Definitions> Journal Line Definition

Note: Source for TIPV account is ‘Invoice distribution Account’. So the account defaulted at invoice distribution
level for TIPV line will be used for accounting.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 49

CASE 7: Create an inventory type PO matched Invoice with different unit price and same tax rate
code in PO and AP (TIPV generated)

STEP 1: Create a PO and calculate tax.

NAVIGATION: Purchasing Super User > Purchase Orders > Purchase Orders
NOTE: Destination type is inventory.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 50

Note: PO Variance account for inventory type PO is defaulted at invoice distribution.

STEP 2: Create a PO matched Invoice and validate it.

NAVIGATION: Payables Super User > Invoices: Entry > Invoices
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 51

Note: Unit price at the time of PO matching is considered as 5. Calculation of TIPV remains same as explained
above.

STEP 3: View Accounting Entry

NAVIGATION: Payables Super User > Invoices: Entry > Invoices > Reports >View Accounting

Note: Account derivation rule for inventory type PO is same as explained above.
TAX VARIANCE CALCULATION FOR PO MATCHED INVOICE 52

REFERENCE

This paper is intended to supplement the following reference materials, which should also be studied for a full
understanding of the topic.
a) E-Business Tax Implementation Guide
b) Oracle Payables User Guide
c) Oracle Purchasing User Guide

CONCLUSION
The goal of this document is to help you learn and understand the generation of TRV, TERV and TIPV lines. For a
more detailed explanation, please refer to E-Business Tax Implementation guide and Oracle Payables User Guide.