PROCESS MAPPING & SOLUTION DOCUMENT

Department: Finance
Units: Payables – Letter of Credit
Author: Ejaz Hussain
Creation Date: June 4, 2009
Last Updated: June 6, 2009
Version 1.0

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Contents

CONTENTS.....................................................................................................................................................................................................2
INTRODUCTION...............................................................................................................................................................................................3
PURPOSE.......................................................................................................................................................................................................3
TYPE OF LETTER OF CREDIT.............................................................................................................................................................................4
SIGHT LETTER OF CREDIT................................................................................................................................................................................5
USANCE LETTER OF CREDIT.............................................................................................................................................................................7
LC TRACKING DFF ENABLED..........................................................................................................................................................................8
LC DETAIL ..................................................................................................................................................................................................9
GLOSSARY OF COMMONLY USED TERMS............................................................................................................................................................13
OPEN AND CLOSED ISSUES FOR THIS DELIVERABLE............................................................................................................................................14
Open Issues..........................................................................................................................................................................................14
Closed Issues........................................................................................................................................................................................14

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Introduction

This paper will provide a practical guide to letters of credit and as there is no functionality as of now
to use Letter of Credit as a means of payment which is increasingly being used, as a workaround in
Oracle Payables to handle payments through Letters of Credit.

Purpose

The requirement is in Abdullah AM AL-Khodari Sons; after they Open LC(Letter of Credit) with bank
against a Supplier, they want to track it in the system.

This document will serve as a basic tool in understanding letters of credit solution within
Payable module.

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Type of Letter of Credit

There are two type of Letter of Credit

1. Sight letter of credit

Sight letter of credit can permit the beneficiary to be paid immediately upon
presentation of specified documents.

2. Usance letter of credit:

Term/Usance Letters of credit can permit the beneficiary to be paid at a
future date as established in the sales contract.

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 Sight Letter of Credit

1. Sight letter of credit:

Sight letter of credit can permit the beneficiary to be paid immediately upon
presentation of specified documents.
Steps:

1.1 Raise a Purchase Order

Raise a Purchase Order in Oracle Purchasing stating the description of goods,

quantity, unit price, and terms of delivery. Purchase order would be issued
after beneficiary examined that all the terms and conditions of letter of credit
are/can be complied with.

1.2 Record a Prepayment Invoice against Vendor

In case of confirmed sight letter of credit the confirming bank is obliged to

honour the drawing without recourse to the beneficiary. Beneficiary (Seller)
should present following documents to Advising / Confirming Bank:

• Invoice with description of goods shown exactly in LC

• Bill of lading and/or other transport documents

• Draft (Bill of exchange)

• Other documents as required by letter of credit

The advising/confirming/negotiating bank will claim reimbursement from the

issuing bank and issuing bank in turn from buyer by debiting his account. On
receipt of the debit advice from Bank enter a Prepayment Invoice in Oracle
Payables against Vendor:
The following transactions will happen.

In cases where seller bears the Debit Credit In cases where title of Debit Credit
risk – (Trade term is goods are deemed to be
DAF/DES/DDU/ DDP) transferred to Buyer (Trade
term is EXW/ FOB/CFR/CIF)
DR. Advance to Supplier XXXX Dr. Goods in Transit xxxx
CR. Supplier – Liability XXXX Cr. Supplier - Liability xxxx

1.3 For Payment of the above Prepayment Invoice

LC payment – Payment methond has been created; use this paymet method
to pay above invoice. It will Dr. Supplier liability, knock of Supplier account
and Cr. Liability a/c – BillPayables.

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 Account Debit Credit
Dr. Supplier – Liability XXXX
Cr. LC Billpayables A/c XXXX

There is one Program that has been schedule to Run every end of day;
it is ’Update Matured Bills Payable Status’
It will Dr. Billpayables a/c and Cr. Bank a/c which you had selected while
making above payment.

Account Debit Credit

Dr. LC Billpayables A/c XXXX
Cr. Bank A/c XXXX

1.4 Receipt of Goods

On receipt of goods record a receipt transaction in Inventory

Account Debit Credit

Dr. Material Account XXXX
Cr. AP Accrual Account XXXX

1.5 On receipt of Invoice from Vendor

Enter an Invoice in Oracle Payables & match it with receipt/Purchase
order:

Account Debit Credit

Dr. AP Accrual Account XXXX
Cr. Liability Account XXXX

1.6 Apply the prepayment against above Invoice

Account Debit Credit

Dr. Liability Account XXXX
Cr. Advance to Supplier / Goods in XXXX
transit

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Usance Letter of Credit

2. Usance letter of credit:

Term/Usance Letters of credit can permit the beneficiary to be paid at a

future date as established in the sales contract.

2.1 Raise a Purchase Order

Raise a Purchase Order in Oracle Purchasing stating the description of
goods, quantity, unit price, and terms of delivery. Purchase order would
be issued after beneficiary examined that all the terms and conditions of
letter of credit are/can be complied with.

2.2 Receipt of Goods.

On receipt of goods record a receipt transaction in Inventory

Account Debit Credit

Dr. Material Account XXXX
Cr. AP Accrual Account XXXX

2.3 On receipt of Invoice from Vendor

Enter an Invoice in Oracle Payables & match it with receipt:

Account Debit Credit

Dr. AP Accrual Account XXXX
Cr. Supplier – Liability XXXX

2.4 For Payment

LC payment – Payment methond has been created; use this paymet
method to pay LC above invoice. It will Dr. Supplier liability, knock of
Supplier account and Cr. Liability a/c – BillPayables.

Account Debit Credit

Dr. Supplier – Liability XXXX
Cr. LC Billpayables A/c XXXX

There is one Program that has been schedule to Run every end of day;
it is ’Update Matured Bills Payable Status’
It will Dr. Billpayables a/c and Cr. Bank a/c which you had selected while
making above payment.

Account Debit Credit

Dr. LC Billpayables A/c XXXX
Cr. Bank A/c XXXX

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LC Tracking DFF enabled
The Following setups were done to achieve the above Functionality

 Defined an Independent Value set for LC Tracking.

 Enabled Context Sensitive DFF at “LC Tracking Value Set” values

definition, this includes:

a) Supplier
b) Currency
c) Issuer Bank
d) Foreign Currency Amount
e) Functional Currency Amount
f) Date of Issue
g) Date of Expiry

 Defined DFF at Invoice Entry Header Level with one segment “LC
Number” with the table validated value set attached. This value set
is created with the validations of Supplier and Invoice Currency Code
and user can select the LC Numbers available against the Supplier
and the currency while entering Prepayment/Standard invoice

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LC Detail
When LC opened with bank record the LC details:
Step-1: Entered LC Details in Flexfield Segment Values
Navigation> Payables> Setup> Flexfields>Descriptive>Values

Click Here

Click on Values and then Type LC Tracking in name field:

Click
(a)he TYPE “LC TRACKING” Here
re

Press find button

when above two
task done

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It will shows the values of exisitng LC numbers;
Enter New LC number and its Drescription

Then Press Tab button to enter its details

After pressing the Tab button the following Screen will comes

Enters LC details at here i.e.:

Supplier Name:
Currency:
Issuer Bank:
Foreign Currency Amount:
Functional Currency Amount:
Date of issue:
Date of Expiry:

Save your work and now its ready to choose LC numbers while entering
Prepayment/Standard Invoice in Invoice workbench

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Invoice Workbench
While entering Prepayment/Standard Invoice go to Invoice header level DFF
and after entering Project and Department code, click on Invoice Reference
and select LC Detail from Drop down LIST:

Once you select LC details: The LC number fields appears

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Select LC numbers from Drop down List:
It will only shows the LC numbers of supplier you had selected in Invoice
Workbench

Press Ok button to go back to invoice workbench and complete your Invoice

as ususal.

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Glossary of commonly used terms
Issuing bank: The bank which issues the letter of credit on the instructions of the importer
(usually, but not necessarily, the importer's own bank).
Beneficiary: The party in whose favour the letter of credit is issued.
Advising bank: The bank, usually but not necessarily in the beneficiary's country, through
which advice of the letter of credit is sent by the issuing bank.
Confirming bank: A bank usually in the country of the beneficiary which, at the request of
the issuing bank, joins that bank in undertaking to honour drawings made by the beneficiary,
provided the terms and conditions of the letter of credit have been complied with.
Negotiating bank: The bank specifically nominated in the letter of credit to purchase the bill
of exchange (draft) drawn by the beneficiary on a drawee other than the negotiating bank. (If
a letter of credit is freely negotiable, any bank willing to do so can be the negotiating bank).
EXW ‐ Ex works: "Ex Works" is the minimum/lowest obligation of a seller. The seller agrees
to make the goods available to the buyer at the seller's premises (named place). The seller
under EXW is not even responsible for bearing the cost of loading the goods onto the vehicle
provided by the buyer, unless otherwise agreed in advance. The buyer bears the full cost and
risks involved in bringing the goods from the EXW location to the ultimate destination.
FOB – Free on board: Goods shipped under FOB terms are placed on board the ship by the
seller at the specific port of shipment named in the sales agreement/purchase order/contract.
All costs and risks from the point where the cargo "crosses the ship's rail" (i.e. is lifted from
the quay/pier onto the vessel) passes to the buyer.
CFR – Cost & freight: Under CFR, the title and risks change at the ship's rail, just as in FOB
terms, but the cost allocation is different. For goods shipped under CFR, the seller pays all
costs to deliver the goods up to the named port of destination (while under FOB, above, the
buyer is responsible for those costs).
CIF – Cost, insurance & freight: In its simplest form, CIF is CFR + Insurance. The seller
must procure transport insurance against the risk of loss or damage to the goods (to the
extent that is mutually agreed upon in the sales agreement). Seller contracts with insurance
carrier or agent and pays the premium ‐ but issues insurance in a form/format that allows the
buyer to later make claim directly to the insurance carrier or said carrier's agent. (Since
Title/Risk has changed hands at FOB point, the seller is no longer entitled to make claim,
unless specifically on behalf of the buyer, who, in fact, owns the goods.)
DAF – Delivered at frontier: DAF means that the seller is obliged to move the goods to the
named place at the frontier (border crossing). This is primarily a rail/truck term. The seller
bears all costs/risks up to this point, but is not responsible for customs clearance, duty, or
taxes
DES – Delivered ex ship: Using DES requires the seller to make the goods available to the
buyer "on board the ship at the place named in the sales contract". Unlike CFR and CIF
terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of
the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc… are
for the Buyer.
DDU – Delivered duty unpaid: DDU terms require that the seller delivers the goods to the
buyer, UNCLEARED FOR IMPORT, at the point or place named in the sales agreement. The
seller bears all costs and risks up to this point/place.
DDP – Delivered duty paid: Just as EXW represented the seller's minimum obligation in an
international transaction, DDP would represent the seller's MAXI MUM obligation. Under DDP,
the seller agrees to all costs and risks, including customs clearance fees and payment of
import duties, up to the named place/point.

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 Open and Closed Issues for this Deliverable

Open Issues

ID Issue Resolution Responsibility Target Impact

Date Date

LC_RPT Custom reports can be

designed to see the LC
status

Closed Issues

ID Issue Resolution Responsibility Target Impact

Date Date

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