Example of Foreign Currency and Unbilled Receivable Adjustments Prospective Merge After Partial Billing
The following example illustrates the foreign currency and unbilled receivable adjustments for a prospective merge after partial billing. In this example:
-
A company with U.S. dollar (USD) as its base currency enters a contact with a customer that does business in euros. The contract is in euros, so euros is the transaction (foreign) currency.
-
The accounting preference Exclude Contract Assets from FX Reclassification is checked. Therefore, reclassification generates only foreign currency adjustments related to recognized and planned revenue amounts that have been billed.
-
The accounting preference Unbilled Receivable Adjustment Journal Grouping is set to Element. Therefore, the unbilled receivable adjustment is calculated for each revenue element.
-
A positive revenue arrangement with two revenue elements from a sales order in February is prospectively merged.
-
There are two items (Item A and Item B) in the sales order. Item A is fully billed in February. Item B has not been billed yet.
Activity for each month is as follows:
-
February Activity – Sales order, partial billing, revenue recognition, and reclassification
-
March Activity – Prospective merge, revenue recognition, and reclassification
-
April Activity – Final billing, revenue recognition, and reclassification
February Activity
On February 1, the following records are created in NetSuite:
-
A sales order with 2 item lines to represent the contract, which totals €1,320. The sales order uses a currency exchange rate of 2.00 to convert euros in the transaction to U.S. dollars in the general ledger. No discounts are applicable.
-
The system generates a revenue arrangement for the sales order with transaction total and total revenue of €1,320.
-
On revenue arrangement creation, the system generates actual revenue plans for the revenue elements in the base currency (USD). All plans use the same revenue recognition rule with recognition spread evenly over 3 periods beginning on the arrangement date of February 1 and ending on April 30. The plan exchange rate of 2 is the same as the sales order and revenue arrangement.
-
Invoice for a portion of the sales order (all of Item A).
Sales Order and Revenue Arrangement
The sales order includes two items and no discount.
|
Item |
Quantity |
Sales Amount (Foreign) |
Sales Amount (Base) |
Calculated Fair Value Amount |
Revenue Amount (Foreign) |
Revenue Amount (Base) |
|---|---|---|---|---|---|---|
|
A (Element 1) |
1 |
€120 |
$240 |
3 |
(3 ÷ 4) × 1,320 = €990 |
990 ×2 =$1,980 |
|
B (Element 2) |
1 |
€1,200 |
$2,400 |
1 |
(1 ÷ 4) × 1,320 = €330 |
330 ×2 =$660 |
|
Total |
|
€1,320 |
$2,640 |
4 |
€1,320 |
$2,640 |
February Invoice 1
On February 1, the company bills a portion of the sales order. The euro to U.S. dollar exchange rate on the invoice is 10.
|
Item |
Quantity |
Amount (Foreign) |
Amount (Base) |
|---|---|---|---|
|
A |
1 |
€120 |
$1,200 |
At the end of the period, the company creates journal entries to recognize revenue according to the revenue plan. Then, the company runs the reclassification process.
February Foreign Currency Adjustment
The following table shows the calculation for the foreign currency adjustment. FX Rate stands for currency exchange rate. The adjustment is a gain. For more information about foreign currency adjustments, see Foreign Currency Adjustment.
|
E |
Cumulative Rev Rec (Foreign) |
Effective Cumulative Billing (Foreign) |
Overlap ( |
Cumulative Rev Rec (Base) |
Effective Cumulative Billing (Base) |
Effective Rev Rec FX Rate |
Effective Billing FX Rate |
Foreign Currency Adjustment |
|---|---|---|---|---|---|---|---|---|
|
Item A ( |
€330 |
€120 |
€120 |
$660 |
$1,200 |
2 |
10 |
120 × (10 – 2) = $960 |
February Unbilled Receivable Adjustment
An unbilled receivable adjustment is created for February because cumulative billing is less than cumulative revenue recognition for Item A and Item B. The unbilled calculations are as follows:
-
For Item A, the billed amount is 120 and the recognized amount is 330, leaving an unbilled amount of 210.
-
For Item B, the billed amount is 0 and the recognized amount is 110, leaving an unbilled amount of 110.
For more information about unbilled receivable adjustments, see Unbilled Receivable Adjustment.
|
Account |
Debit (Foreign) |
Credit (Foreign) |
|---|---|---|
|
Unbilled Receivable |
320 |
|
|
Deferred Revenue 1 |
|
210 |
|
Deferred Revenue 2 |
|
110 |
February Month-End Summary and Balances
The following tables show the month-end summary and balances for all accounts.
|
February 1 |
Invoice |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Accounts Receivable |
1,200 |
|
0 |
1,200 |
|
Deferred Revenue 1 |
|
1,200 |
0 |
-1,200 |
|
February 28 |
Revenue Recognition Journal |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Deferred Revenue 1 |
660 |
|
-1,200 |
540 |
|
Income 1 |
|
660 |
0 |
-660 |
|
Deferred Revenue 2 |
220 |
|
0 |
220 |
|
Income 2 |
|
220 |
0 |
-220 |
|
February 28 |
Foreign Currency Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Income 1 |
|
960 |
-660 |
-1620 |
|
Deferred Revenue 1 |
960 |
|
-540 |
420 |
|
February 28 |
Unbilled Receivable Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Unbilled Receivable |
640 |
|
0 |
640 |
|
Deferred Revenue 1 |
|
420 |
420 |
0 |
|
Deferred Revenue 2 |
|
220 |
220 |
0 |
March Activity
In March, the company prospectively merges the two elements in the revenue arrangement.
Prospective Merge Revenue Arrangement 2
New revenue elements are created for the prospectively merged revenue arrangement. The prospective merge process prorates the discounted sales amount on the new arrangement to represent the modified service obligation. The exchange rate on each revenue element remains the same as before the prospective merge.
The original billed amount of 120 for Item A is split across elements 1 and 3 in the new and locked revenue arrangements based on the Prorated Discounted Sales Amount (Foreign) on each arrangement. The Prorated Discounted Sales Amount (Foreign) for Item A (Element 3) is 80, so the bill amount is 80. The remaining 40 appears on Item A (Element 1) on the original locked revenue arrangement.
The Prorated Discounted Sales Amount (Foreign) is the Premerge Prorated Discounted Sales Amount (Foreign) on the original revenue arrangement minus the Prorated Discounted Sales Amount (Foreign) on the original revenue arrangement. For more information about this field, see Revenue Element Field Reference.
The effective date of the prospective merge is March 1. This date is the first day of the first open period.
|
E |
O |
Qty |
E |
Original Discounted Sales Amount |
Discounted Sales Amount |
C |
Prorated Discounted Sales Amount (Foreign) |
Prorated Discounted Sales Amount (Base) |
|---|---|---|---|---|---|---|---|---|
|
Item A ( |
1 |
0.66666667 |
2.00 |
120.00 |
-210.00 |
2.00 |
120 – 40 = €80.00 |
240 – 80 = $160.00 |
|
Item B ( |
1 |
0.66666667 |
2.00 |
1,200.00 |
1,090.00 |
0.67 |
1,200 – 400 = €800.00 |
2,400 – 800 = $1,600.00 |
Original Locked Revenue Arrangement
The prospective merge process prorates the discounted sales amounts on the original locked revenue arrangement using the element discounted sales amount ratio.
The Prorated Discounted Sales Amount (Foreign) is the element discounted sales amount ratio in foreign currency multiplied by the total recognized amount of the arrangement in foreign currency. For more information about this field, see Revenue Element Field Reference.
The billed amount of 120 for Item A is split across elements 1 and 3 in the new and locked revenue arrangements based on the Prorated Discounted Sales Amount (Foreign) on each arrangement. The Prorated Discounted Sales Amount (Foreign) for Item A (Element 1) is 40, so the bill amount is 40.
|
E |
O |
Qty |
E |
Original Discounted Sales Amount |
D |
Prorated Discounted Sales Amount (Foreign) |
Premerge Discounted Sales Amount (Foreign) |
Prorated Discounted Sales Amount (Base) |
Premerge Prorated Discounted Sales Amount (Base) |
|---|---|---|---|---|---|---|---|---|---|
|
Item A ( |
1 |
0.3333333 |
2.00 |
120.00 |
330.00 |
(120 ÷ 1,320) × 440 = €40 |
€120.00 |
(240 ÷2,640) ×880 =$80 |
€240.00 |
|
Item B ( |
1 |
0.3333333 |
2.00 |
1,200.00 |
110.00 |
(1,200 ÷ 1,320) × 440 = €400 |
€1,200.00 |
(2,400 ÷2,640) ×880 =$800 |
€2,400.00 |
March Foreign Currency Adjustment
Since the bill amount of 120 was split across the new and locked revenue arrangements, a new foreign currency adjustment is created to account for the new effective cumulative billing amount on each revenue element.
The following table shows the calculation for the foreign currency adjustment. FX Rate stands for currency exchange rate. Item A (Element 1) is a loss, and Item A (Element 3) is a gain. For more information about foreign currency adjustments, see Foreign Currency Adjustment.
|
E |
Cumulative Rev Rec (Foreign) |
Effective Cumulative Billing (Foreign) |
Overlap ( |
Cumulative Rev Rec (Base) |
Effective Cumulative Billing (Base) |
Effective Rev Rec FX Rate |
Effective Billing FX Rate |
Foreign Currency Adjustment |
|---|---|---|---|---|---|---|---|---|
|
Item A ( |
€330 |
€40 |
€40 |
$660 |
$400 |
660 ÷330 =2 |
400 ÷40 =10 |
40 × (10 – 2) – 960 = $-640 |
|
Item A ( |
€330 |
€80 |
€80 |
$660 |
$800 |
660 ÷330 =2 |
800 ÷80 =10 |
80 × (10 – 2) = $640 |
March Reversal of Prior Unbilled Receivable Adjustment
A reversal of the prior unbilled receivable adjustment is created to reverse the February adjustment.
|
Account |
Debit (Foreign) |
Credit (Foreign) |
|---|---|---|
|
Unbilled Receivable |
|
320 |
|
Deferred Revenue 1 |
210 |
|
|
Deferred Revenue 2 |
110 |
|
March Unbilled Receivable Adjustment
A new unbilled receivable adjustment is created in March because cumulative billing is less than cumulative revenue recognized for every element. An unbilled receivable adjustment is created for the two elements on the prospective merge revenue arrangement and the two elements on the original locked revenue arrangement.
Note that the original bill amount of 120 for Item A is split across element 1 and element 3 because of the prospective merge. The unbilled calculations are as follows:
-
For Item A (Element 1), the billed amount is 40 and the recognized amount is 330, leaving an unbilled amount of 290.
-
For Item B (Element 2), the billed amount is 0 and the recognized amount is 110, leaving an unbilled amount of 110.
-
For Item A (Element 3), the billed amount is 80 and the recognized amount is 330, leaving an unbilled amount of 250.
-
For Item B (Element 4), the billed amount is 0 and the recognized amount is 110, leaving an unbilled amount of 110.
For more information about unbilled receivable adjustments, see Unbilled Receivable Adjustment.
|
Account |
Debit (Foreign) |
Credit (Foreign) |
|---|---|---|
|
Unbilled Receivable |
760 |
|
|
Deferred Revenue 1 |
|
540 |
|
Deferred Revenue 2 |
|
220 |
March Month-End Summary and Balances
The following tables show the month-end summary and balances for all accounts.
|
March 31 |
Revenue Recognition Journal |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Deferred Revenue 1 |
660 |
|
0 |
660 |
|
Income 1 |
|
660 |
-1,620 |
-2,280 |
|
Deferred Revenue 2 |
220 |
|
0 |
220 |
|
Income 2 |
|
220 |
-220 |
-440 |
|
March 31 |
Foreign Currency Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Income 1 |
|
640 |
-2,280 |
-2,920 |
|
Deferred Revenue 1 |
640 |
|
660 |
1,300 |
|
Income 1 |
640 |
|
-2,920 |
-2,280 |
|
Deferred Revenue 1 |
|
640 |
1,300 |
660 |
|
March 31 |
Reversal of Prior Unbilled Receivable Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Unbilled Receivable |
|
640 |
640 |
0 |
|
Deferred Revenue 1 |
420 |
|
660 |
1,080 |
|
Deferred Revenue 2 |
220 |
|
220 |
440 |
|
March 31 |
Unbilled Receivable Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Unbilled Receivable |
1,520 |
|
0 |
1,520 |
|
Deferred Revenue 1 |
|
1,080 |
1,080 |
0 |
|
Deferred Revenue 2 |
|
440 |
440 |
0 |
April Activity
On April 1, the company bills the remaining portion of the sales order. The euro to U.S. dollar exchange rate on the invoice is 3.
April Invoice 2
|
Item |
Quantity |
Amount (Foreign) |
Amount (Base) |
|---|---|---|---|
|
B |
1 |
€1,200 |
$3,600 |
April Carve In/Carve Out Adjustment
A carve in/carve out adjustment is created because the sales price of all revenue elements is different than the revenue amount. For more information about carve in/carve out adjustments, see Carve In/Carve Out Adjustment.
|
Item |
Carve Out (Source) |
Carve In (Source) |
|---|---|---|
|
A (Element 1) |
— |
290 |
|
B (Element 2) |
290 |
— |
|
A (Element 3) |
— |
580 |
|
B (Element 4) |
580 |
— |
April Foreign Currency Adjustment
A new foreign currency adjustment is created in April.
The following table shows the calculation for the foreign currency adjustment. FX Rate stands for currency exchange rate. The adjustment is a gain. For more information about foreign currency adjustments, see Foreign Currency Adjustment.
|
E |
C |
Effective Cumulative Billing (Foreign) |
Overlap ( |
Cumulative Rev Rec (Base) |
Effective Cumulative Billing (Base) |
Effective Rev Rec FX Rate |
Effective Billing FX Rate |
Foreign Currency Adjustment |
|---|---|---|---|---|---|---|---|---|
|
Item A ( |
€330 |
€330 |
€330 |
$660 |
$1,270 |
660 ÷330 =2 |
1,270 ÷330 =3.848 |
330 × (3.848 – 2) – -640 – 960 = $290 |
|
Item A ( |
€660 |
€660 |
€580 |
$1,320 |
$2,540 |
1,320 ÷660 =2 |
2,540 ÷660 =3.848 |
660 × (3.848 – 2) – 640 = $580 |
|
Item B ( |
€110 |
€110 |
€110 |
$220 |
$330 |
220 ÷110 =2 |
330 ÷110 =3 |
110 × (3 – 2) = $110 |
|
Item B ( |
€220 |
€220 |
€220 |
$440 |
$660 |
440 ÷220 =2 |
660 ÷220 =3 |
220 × (3 – 2) = $220 |
April Reversal of Prior Unbilled Receivable
A reversal of the prior unbilled receivable adjustment is created to reverse the March adjustment.
|
Account |
Debit (Foreign) |
Credit (Foreign) |
|---|---|---|
|
Unbilled Receivable |
|
760 |
|
Deferred Revenue 1 |
540 |
|
|
Deferred Revenue 2 |
220 |
|
April Month-End Summary and Balances
The following tables show the month-end summary and balances for all accounts.
|
April 1 |
Invoice 2 |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Accounts Receivable |
3,600 |
|
1,200 |
4,800 |
|
Deferred Revenue 2 |
|
3,600 |
0 |
-3,600 |
|
April 30 |
Revenue Recognition Journal |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Deferred Revenue 1 |
660 |
|
0 |
660 |
|
Income 1 |
|
660 |
-2,280 |
-2,940 |
|
Deferred Revenue 2 |
220 |
|
-3,600 |
-3,380 |
|
Income 2 |
|
220 |
-440 |
-660 |
|
April 30 |
Carve in/Carve Out Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Deferred Revenue 2 |
2,610 |
|
-3,380 |
-770 |
|
Deferred Revenue 1 |
|
2,610 |
660 |
-1,950 |
|
April 30 |
Foreign Currency Adjustment |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Income 2 |
|
330 |
-660 |
-990 |
|
Deferred Revenue 2 |
330 |
|
-770 |
-440 |
|
Income 1 |
|
870 |
-2,940 |
-3,810 |
|
Deferred Revenue 1 |
870 |
|
-1,950 |
-1,080 |
|
April 30 |
Reversal of Prior Unbilled Receivable |
|||
|---|---|---|---|---|
|
Account |
Debit (Base) |
Credit (Base) |
Starting Balance |
Ending Balance |
|
Unbilled Receivable |
|
1,520 |
1,520 |
0 |
|
Deferred Revenue 1 |
1,080 |
|
1,080 |
0 |
|
Deferred Revenue 2 |
440 |
|
-440 |
0 |
At the end of April, the prospectively merged and locked revenue arrangement have been fully recognized and reclassified. The deferred revenue balance is 0.