Strategic Guide to e-Procurement
Payment Methods and Tools
Evaluated Receipt Settlement (ERS)
ERS is when an FMIS/ERP system uses PO information and goods receipt information to automatically generate an invoice and pay it, without receiving an invoice from the supplier
Evaluated Receipt Settlement (ERS) produces an automated payment to suppliers on delivery of purchases of goods without the requirement for a paper invoice from the supplier. When the supplier delivers the goods or service, a goods receipt is raised in the FMIS/ERP system to confirm that the goods or service have been received. The ERS program then generates an invoice on the basis of the price in the purchase order and the quantity as measured in the goods receipt.
The FMIS/ERP system also establishes tax information and terms of payment from the purchase order. This information allows the system to generate, post and pay an invoice, negating the need for a vendor invoice to be submitted to Accounts Payable (A/P).
Credit memos can also be created using ERS. If an invoice has already been posted for a goods receipt, and goods are returned, the system has the ability to automatically generate a credit memo for the returned quantity during the next ERS run.
The Evaluated Receipt Settlement (ERS) function has the following advantages:
- reduces the number of invoices received at Accounts Payable
- ensures payment is made at the contracted rate
- payment to suppliers can be accelerated as they do not need to send a separate invoice which may require separate approval.
There are some challenges associated with implementing ERS including:
- to use an ERS suppliers may have to modify their billing and processing systems and turn off the automatic invoice generation
- ERS does not cater for unexpected costs or items that are not known at the time of raising the purchase order
- suppliers paid via ERS are dependent on the agency raising a goods receipt in a timely fashion. In some organisations goods receipts are not raised all the time which means the supplier will not be paid expediently.
The Evaluated Receipt Settlement creates a log of completed transactions. In a standard purchase transaction, the supplier is required to issue a tax invoice in compliance with the GST legislation. Under an ERS scenario, the supplier does not submit a tax invoice, so the concept of a Recipient Created Tax Invoice (RCTI) has been established.
RCTI is where the agency creates a tax invoice and sends it to the supplier
The Australian Taxation Office has recognised that in an ERS system, the organisation receiving the invoice can create a tax invoice on behalf of the supplier which complies with relevant tax legislation. This Recipient Created Tax Invoice (RCTI) is simply the ERS generated invoice that accompanies the payment made to the supplier.
RCTIs can be issued by an agency if the following conditions are satisfied, as indicated by the Australian Taxation Office:
- both the recipient and the supplier are registered for GST
- the recipient and the supplier must have a written agreement stating which supplies are covered. The agreement must be current and effective when the recipient created tax invoice is issued.
- the Tax Office must have determined that those supplies are of a kind that can have recipient created tax invoices issued.A recipient created tax invoice must meet the following criteria to be valid:
- contain all the information required for a tax invoice
- prominently state the words ‘Recipient Created Tax Invoice’
- prominently state the Australian Business Number (ABN) of the supplier and the recipient.
Summary of Checkpoints
RCTI-ERS
- a Determine if a long–term and a positive relationship is in place with the supplier
- a Identify if the supplier has frequent occurrences of misappropriate billing or incorrect shipments
- a Undertake this initiative with trusted suppliers that have a high degree of correct orders and correct billing
- a Ensure that all ATO requirements are met for RCTI usage
- a Consult with suppliers to:
- a ensure an understanding of the changes that may be required to take advantage of RCTI ERS
CASE STUDY 5
Utilising RCTI for Contract Labour at Centrelink
In 2004, Centrelink employed approximately 400 contractors across the agency and was receiving nightly or fortnightly paper invoices for each contractor. In order to reduce the number of paper invoices and automate the manual process, Centrelink leveraged the technology in their FMIS to electronically pay contractors without the need for them to submit invoices.
Centrelink utilised the Electronic Timesheeting functionality in their FMIS to create electronic timesheets for the contractors. The contractors enter the number of hours completed in a given week into the system. The timesheets are then electronically sent to the contractors’ manager for approval. The information is then automatically transferred out of the Human Resources portion of the FMIS and into the Financials.
Blanket Purchase Orders (POs) are established for the length of the contractor’s commitment indicating the total number of hours to be worked and the agreed contract rate per hour. The electronic timesheet “draws down” the number of hours from the blanket order and calculates the total amount of the payment against the established hourly rate. The receipt against the PO is then made by the purchasing officer.
The payment process is then automatically triggered and an EFT payment is sent.
A Recipient Created Tax Invoice (RCTI) is created and mailed to the suppliers along with a remittance advice.
Suppliers no longer provide invoices and the accounts processing function do not have to process the 20,000 or more invoices received annually for contractor services.
Benefits:
- Utilises technology available in the FMIS system
- RCTI negates the need for suppliers to send a paper tax invoice
- Reduced invoicing errors through using contracted rate for invoice calculation
- Reduced number of invoices for processing
Challenges:
- Travel & expense claims still need to be submitted separately
- Timesheeting entries currently need to be re–keyed from Human Resources module into Financials
- RCTI and remittance advice is printed and mailed to the suppliers manually
Contact for information on this page: ICT Procurement