revenue recognition ar

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Revenue Recognition can be Challenging …

Revenue Accounting – What does it Mean?

There are 2 aspects to accounting for revenue transactions

Revenue Recognition

Accounting entries related to revenue

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Revenue Recognition

Refers to the timing of booking revenue entries for sales transactions

Governed by GAAP (Generally Accepted Accounting Principles) as well as industry-specific accounting pronouncements

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Accounting for Revenue

Relates to the determination of the appropriate revenue accounts for specific sales transactions

In other words, when there is a sales transaction to account for, how is the revenue GL account determined?

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Revenue Recognition Principles

There are 4 basic revenue recognition criteria that must be met in order to recognize revenue:

Persuasive Evidence of an Arrangement Exists

Delivery has occurred

Vendor’s Fee is Fixed or Determinable

Collectibility is probable

Sound rather intimidating? What do these criteria mean? Let’s take them one at a time …

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Persuasive Evidence of an Arrangement Exists

Refers to some type of legal evidence that a selling relationship exists between the vendor and the customer

Typically, this evidence takes the form of a sales contract/agreement or a purchase order issued by the customer to the vendor

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Delivery has Occurred

Refers to completion of the delivery event

Shipment of Product FOB Origin FOB Destination

Delivery of Services Services are complete Completed Contract Accounting Percentage of Completion Accounting

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Vendor’s Fee is Fixed or Determinable

A pricing arrangement for the sales transaction exists whereby the price is fixed or determinable

Pricing designated by contractPricing identified in acknowledged purchase

order

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Collectibility is Probable

Means that collection of the resulting receivable should be reasonably assured at the time the sale is made

If a business sells to a customer that carries considerable credit risk or has a record of either slow or non-payment of invoices, then revenue recognition must be deferred until payment is received

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So … what does all this mean for your Oracle Apps Implemention?

During the requirements gathering phase of your implementation, it is important to identify and understand the revenue-related accounting requirements for your business

Be sure to involve your Finance team and consider the revenue recognition principles described above as well as any industry-specific accounting pronoucements issued by the FASB (Financial Accounting Standards Board)

Take time to understand standard Oracle functionality Assess the match between Oracle and your business

requirements … analyze gaps

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Oracle Receivables Functionality:

1. Revenue Recognition Accounting Rules Revenue Recognition Program System Options Settings – Revenue Policy Event-Based Revenue Management

2. Accounting for Revenue Transactions AutoAccounting Distribution Sets Revenue Accounting Feature

Revenue Recognition will occur on the AR Transaction GL Date in the absence of any revenue-related configurations

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Accounting Rules:

When the requirement is to recognize revenue over multiple accounting periods, accounting rules define how revenue is to be allocated across periods

Cannot be used when the Accounting Method defined in System Options is “Cash Basis”

Essentially allow you to define Revenue Recognition Schedules for your AR Transactions

Can define as many accounting rules as you need to manage your business activities

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Accounting Rules (cont’d):

Can be associated with invoices imported using AutoInvoice or invoices created manually using the Receivables forms

Default Accounting Rules can be associated with: Items (Invoicing tabbed region) Standard Memo Lines Order Types Sales Orders Service Contracts

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System Options:

Accounting Method If you are using Accounting Rules, be sure to select “Accrual” as

your accounting method

Revenue Policy For more complex revenue recognition scenarios, allows you to

define the criteria around the deferral of revenue when using the Revenue Management Engine to make automated revenue recognition decisions on imported invoices

If you do not define these options, Oracle will not attempt to make automatic revenue recognition decisions

Criteria provided are: Standard Refund Policy Payment Term Threshold Credit Classifications

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Revenue Recognition Program:

A standard Oracle Receivables program used to generate the revenue distributions for invoices and credit memos that use Accounting Rules

The program can be run on demand as a concurrent request

When you run GL Interface, the Revenue Recognition Program is automatically run first. However, you should plan to run the Revenue Recognition Program periodically separate from the GL Interface.

When submitted, the program selects all transactions with rules that have not been picked up in a previous submission

The program creates the Revenue schedule for all accounting periods specified by the rule associated with each transaction line

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Event-Based Revenue Management:

For more complex revenue recognition scenarios

Works with invoices imported using AutoInvoice

Automatically analyzes collectibility using the following criteria: Customer Credit Worthiness Contract Contingencies – extended payment terms, non-standard refund

policies and fiscal funding, forfeiture and acceptance clauses

Automatically makes the decision whether to initially distribute revenue to an Earned Revenue or Unearned Revenue account

AutoAccounting then determines the GL account distributions

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AutoAccounting:

AutoAccounting rules define how the segments of the accounting flexfield are derived for the following types of transaction distributions:

Revenue Unearned Revenue Receivable Unbilled Receivable Freight Tax AutoInvoice Clearing

For each segment of your accounting flexfield, specify in Receivables AutoAccounting setups how Oracle should determine the segment value.

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AutoAccounting (cont’d):

For Revenue AutoAccounting, the following sources (table name or constant value) may be used to determine the revenue account segments:

Constant Value Customer Bill-To Site Salesperson Standard Lines (Standard Memo Lines or Inventory Item) Transaction Type

Use Constant Value when the value for the accounting flexfield segment should always be the same

For any of the other table options, keep in mind that you must populate the values on each of these sources. For example, if you select Inventory Item as the source, you must populate the Revenue Account on each of your Inventory items.

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Revenue Accounting Feature

This feature can be used to adjust revenue and sales credits at the transaction or transaction line level

An Actions Wizard is provided to guide you through the adjustment process

The Wizard can also be used to record early acceptance in revenue scenarios where there are contract acceptance contingencies

Oracle Receivables also provides a Revenue Adjustment API to automatically make adjustments

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Revenue Accounting Feature (cont’d):

The following actions can be performed using the Actions Wizard: Earn Revenue Unearn Revenue Revenue prior revenue adjustments Record early acceptance Add non-revenue sales credits Transfer revenue and non-revenue sales credits

The Wizard provides selection criteria to assist you in choosing the appropriate lines for revenue adjustment

AutoAccounting provides the distributions for revenue adjustments

Review and approval of the changes is also offered

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Integration with Other Modules

Oracle Receivables integrates and receives transactions from several other modules such as:

Order Management Service Contracts Projects

Therefore, revenue recognition and accounting requirements must be considered during the implementation and configuration of these modules as well

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Integration with Other Modules

Order Management Service Contracts Projects

Receivables

General Ledger

Invoice Distributions

Transaction Distributions

Revenue Distributions

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Order Management

Typically, Order Management is used in scenarios where the shipment of product is the revenue recognition driver

Be careful to consider whether product shipments to customers are FOB Origin or FOB Destination

Revenue can be recognized on FOB Origin shipments at the time of shipment from your facility

Revenue cannot be recognized on FOB Destination shipments until the product arrives at the customers’ location

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Order Management (cont’d)

In FOB Destination situations, Oracle standard functionality does not offer a mechanism to delay revenue recognition and record the customer receipt event to trigger revenue recognition.

When OM sends the order information to Receivables for billing, the revenue is scheduled to be recognized immediately

To deal with this shortfall, many businesses make journal entries on a monthly, quarterly and especially year-end basis to reverse the effect of revenue taken on FOB Destination orders

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Order Management (cont’d)

Services included on sales orders can also present revenue recognition challenges

Revenue for services is typically recognized as revenue when the service is complete

So, for a service such as training or installation, revenue should be recognized when the training class has been delivered or when the installation services have been completed

However, you may wish to bill for the training or installation in advance of the services being rendered

Without making some specific revenue-related configuration decisions, these items will invoice along with the shipped product on the order and revenue recognition will occur immediately

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Order Management (cont’d):

For services such as Training, consider using “Hold Until” date functionality in OM by placing the order line on hold with a “hold until” date equal to the date the training is scheduled to be delivered

Holds can be used in OM to stop both invoicing and revenue from occurring on service lines

When using Holds to control some of these items, be sure to carefully manage items on hold in OM or revenue recognition may be delayed incorrectly

Also, unless the item has an accounting rule or arrears invoicing rule, order lines will be invoiced and revenue will be recognized as soon as the order interfaces to AR

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Service Contracts

Consider using Service Contracts if you have revenue scenarios such as maintenance or support agreements where revenue must be recognized over the term of the agreement

Service Contracts integrates with Receivables and Accounting Rules can be associated with individual service contracts to control revenue recognition

Service Contracts allows you to define the start and end date of the agreement (the coverage period) and also allows you to define a billing schedule

Based upon the coverage period and the accounting rule assigned to the contract, Receivables can accurately create and manage the revenue recognition schedule

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Service Contracts (cont’d)

Allows you to separate the timing of invoicing from the revenue recognition schedule

Use the Service Contracts Main Billing program to transfer contracts that are ready to be invoiced to Receivables

Use the Revenue Recognition Program in AR to create the revenue recognition schedules for transactions

Service Contracts integrated with Receivables can be a very effective tool for businesses dealing with high volumes of recurring billings

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Projects

Projects functionality includes Draft Invoicing and Draft Revenue Invoices created by the Draft Invoicing process can be reviewed in

Projects and are then interfaced to AR for final invoice generation Revenue entries created by the Draft Revenue process in Projects

can be reviewed in Projects and are subsequently interfaced to GL Invoicing and Revenue Recognition activities are segregated in

Projects This is a slightly different concept. However, it can be useful in

business scenarios where invoicing and revenue recognition should not occur on the same schedule

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Projects (cont’d):

An example might be a sales contract with milestone billing arrangements. In this example, you may need to bill to an agreed billing schedule that is date driven throughout the length of a project. However, revenue recognition should not necessarily follow the same schedule but should be based on revenue-driving events such as the delivery of materials, completion of services or coverage periods.

Projects can be quite effective in these types of scenarios

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In Summary …

Revenue Recognition rules can be very complex

Plan your Oracle Apps implementation with your business’ revenue recognition requirements in mind

Take the time needed to document your revenue recognition requirements and determine how the various Oracle modules can best be leveraged to meet your specific needs

Always involve your Finance team in the requirements gathering and solution design decisions for any module that integrates with Receivables

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