Revenue Recognition can be Challenging

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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 can be Challenging

• 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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Revenue Recognition can be Challenging

• 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 can be Challenging

• 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
• Vendors Fee is Fixed or Determinable
• Collectibility is probable
• Sound rather intimidating? What do these
  criteria mean? Lets take them one at a time

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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Vendors Fee is Fixed or Determinable
• A pricing arrangement for the sales transaction
  exists whereby the price is fixed or determinable
• Pricing designated by contract
• Pricing identified in acknowledged purchase order

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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Oracle Receivables Functionality
• Revenue Recognition
• Accounting Rules
• Revenue Recognition Program
• System Options Settings Revenue Policy
• Event-Based Revenue Management
• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Accounting Rules (contd)
• 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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Revenue Recognition can be Challenging

• 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 can be Challenging

• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• AutoAccounting (contd)
• 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 Recognition can be Challenging

• 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 Recognition can be Challenging

• Revenue Accounting Feature (contd)
• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Integration with Other Modules

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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Order Management (contd)
• 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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Revenue Recognition can be Challenging

• Order Management (contd)
• 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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Revenue Recognition can be Challenging

• Order Management (contd)
• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Service Contracts (contd)
• 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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Revenue Recognition can be Challenging

• 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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Revenue Recognition can be Challenging

• Projects (contd)
• 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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Revenue Recognition can be Challenging

• 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