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Accounting for Trust Receipts, related interest-banking transactions in U.A.E.

Discussion in 'Oracle Financials' started by ravikumarvn, Mar 19, 2012.

  1. ravikumarvn

    ravikumarvn Guest

    In U.A.E., on import of goods, banks give a 6-month credit period for each import under a document called a Trust Receipt(TR). As of now, our accounting is as follows:
    1. When goods come, the supplier (A/P) is credited;
    2. When the bank pays the supplier and grants us a TR, no entry is passed;
    3. If the import is on an acceptance basis, say LC 120 days, in such a case also the supplier is credited but no entry is passed for the acceptance;
    4. When,6 months later, the bank debits our account with the TR amount + interest, the full interest is debited as expense & supplier is debited for the invoice value;
    5. In the case of an acceptance, it is usually converted into a TR for the balance period (180 days-6 months- less no. of days of acceptance). In example 3 above, after 120 days, the bank pays the supplier and converts it into a TR for 60 days. Even here, entry is passed as per 4 above only when the TR matures after 180 days.
    6. For the monthly MIS, the TR amounts kept track of outside Oracle are removed from A/P and reported as due to the bank;

    A few things have to be corrected in order to show the right picture for the monthly MIS:

    1. Supplier (A/P) should be debited immediately after the bank converts it into a TR/Acceptance.TR will be in local currency (AED) while acceptance could be in a foreign currency, usually USD;
    2. TR liability should be created for full amount (i.e. invoice amount in AED plus interest for 6 months), debiting pre-paid interest;
    3. Interest should be accounted for on a monthly basis by debiting interest a/c & crediting pre-paid interest account. This way, interest will not come as a huge debit after 6 months, vitiating monthly bottom-lines, as it is happening now;
    4. At the time of debit, we should, as a bank transaction knock off that particular TR liability with the ability to write-off any small differences in interest amounts as a credit or debit to interest a/c.

    Would be grateful for early feedback on this.


    Ravi Kumar
  2. Ramji

    Ramji Forum Guru

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    Ravi Kumar,

    Interesting ! Let us discuss aloud and then you can test the process and migrate to production. I am giving you some pointers.
    My intial thoughts are

    1) Oracle should be the single source of truth. Maintaining outside system should be eliminated First.

    2) Financing costs are debited as expense So it makes things easier to account for everything in Oracle. Let us approach each issue and tackle each facet individually.

    Accounting for The Import

    a) Enter a PO
    b) When goods are received account for it as normal
    c) At this stage enter the invoice for the supplier and match and book liability.

    Bank Part of the Deal:

    What Documents do you get from the bank?
    Is there a separate bank account to deal with financing imports? Helps reconciling and maintaining audit trail.
    I believe when On acceptance you need to record the liability to the Bank for the LC/Credit Availed to reflect the full picture. For this we can use the Prepayment Functionality (enter and pay the prepayment and apply it against the invoice later)

    The Other facet is the Liability to the Bank which is nothing but the amount of financing received plus interest

    Do they give you the total financing costs upfront in which case you will have to distribute it over the months and accrue. Finally when the Actual debit is reflected in the statement everything will be captured in Oracle and you can reverse your accrual entries and reconcile the bank statement.

    Hope this initial input gives you the info needed to test. I remember in the UAE ( I have implemented an ERP in Jebel Ali in 1998) they usually have a separate bank account for such financing. If thats a case set up the necessary accounts in GL and if you are on R12 set up the bank account and get ready to rumble.

    If you get stuck do not hesitate to post so it will be a learning curve for everyone.