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  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 … 4 .

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 5 .

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 6 .

Revenue Recognition can be Challenging … 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 contract  Pricing identified in acknowledged purchase order 7 .

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 8 .

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 9 .

Revenue Recognition     Accounting Rules Revenue Recognition Program System Options Settings – Revenue Policy Event-Based Revenue Management 1. 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 10 .Revenue Recognition can be Challenging … Oracle Receivables Functionality: 1.

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 11 .Revenue Recognition can be Challenging … Accounting Rules:  When the requirement is to recognize revenue over multiple accounting periods.

Revenue Recognition can be Challenging … 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 12 .

Oracle will not attempt to make automatic revenue recognition decisions  Criteria provided are:  Standard Refund Policy  Payment Term Threshold  Credit Classifications 13 . be sure to select “Accrual” as your accounting method  Revenue Policy  For more complex revenue recognition scenarios.Revenue Recognition can be Challenging … System Options:  Accounting Method  If you are using Accounting Rules. 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.

However. the Revenue Recognition Program is automatically run first.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. you should plan to run the Revenue Recognition Program periodically separate from the GL Interface. 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 14 .  When submitted.

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 15 .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.

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. 16 . specify in Receivables AutoAccounting setups how Oracle should determine the segment value.

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. 17 . you must populate the Revenue Account on each of your Inventory items. if you select Inventory Item as the source. For example. keep in mind that you must populate the values on each of these sources.Revenue Recognition can be Challenging … AutoAccounting (cont’d):  For Revenue AutoAccounting.

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 18 .

Revenue Recognition can be Challenging … 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 19 .

revenue recognition and accounting requirements must be considered during the implementation and configuration of these modules as well 20 .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 can be Challenging … Integration with Other Modules Order Management Service Contracts Projects Invoice Distributions Revenue Distributions Receivables Transaction Distributions General Ledger 21 .

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 22 .

quarterly and especially year-end basis to reverse the effect of revenue taken on FOB Destination orders 23 . the revenue is scheduled to be recognized immediately  To deal with this shortfall. many businesses make journal entries on a monthly.  When OM sends the order information to Receivables for billing.Revenue Recognition can be Challenging … 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.

revenue should be recognized when the training class has been delivered or when the installation services have been completed  However. these items will invoice along with the shipped product on the order and revenue recognition will occur immediately 24 . for a service such as training or installation. 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.Revenue Recognition can be Challenging … 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.

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. order lines will be invoiced and revenue will be recognized as soon as the order interfaces to AR 25 . unless the item has an accounting rule or arrears invoicing rule. be sure to carefully manage items on hold in OM or revenue recognition may be delayed incorrectly  Also.Revenue Recognition can be Challenging … Order Management (cont’d):  For services such as Training.

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 26 .

Revenue Recognition can be Challenging … 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 27 .

it can be useful in business scenarios where invoicing and revenue recognition should not occur on the same schedule 28 . However.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.

revenue recognition should not necessarily follow the same schedule but should be based on revenue-driving events such as the delivery of materials. In this example. you may need to bill to an agreed billing schedule that is date driven throughout the length of a project.Revenue Recognition can be Challenging … Projects (cont’d):  An example might be a sales contract with milestone billing arrangements.  Projects can be quite effective in these types of scenarios 29 . However. completion of services or coverage periods.

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 30 .

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