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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
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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:

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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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
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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 can be
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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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Revenue Recognition can be
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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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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
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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 Recognition can be
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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
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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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Revenue Recognition can be
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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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Revenue Recognition can be
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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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Revenue Recognition can be
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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
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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
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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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Revenue Recognition can be
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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
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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