Carve In/Carve Out Adjustment Example Retrospective Merge Before Billing
The following example illustrates how the carve portion of revenue allocation works with the adjustment during reclassification. For background information, see the following topics:
In this example:
-
A positive revenue arrangement from a sales order is combined with a negative revenue arrangement from a return authorization by using a retrospective merge.
-
The merge occurs before any invoices or credit memos.
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The transaction currency and base currency are the same, the pound sterling.
-
The revenue plans divide the revenue equally over four periods.
Details of the activity for each month are as follows:
-
January Activity – Sales order, return authorization, merge, partial billing, revenue recognition, and reclassification
-
February Activity – Credit memo, revenue recognition, and reclassification
-
March Activity – Final billing, revenue recognition, and reclassification
-
April Activity – Revenue recognition and reclassification (not shown)
January Activity
During January, the following transactions are created:
-
Sales order and its revenue arrangement
-
Return authorization and its revenue arrangement for a portion of the sales order
-
Retrospectively merged revenue arrangement combining the sales order and return authorization lines
-
Partial billing of the sales order
-
Month-end revenue recognition and reclassification of deferred revenue
Sales Order
The sales order includes four items and no discount. Details from the revenue arrangement are as follows:
Item |
Qty |
Sales Amount |
Calculated FV Amount |
Revenue Amount |
Carve Out |
Carve Out Ratio |
Carve In |
Carve In Ratio |
---|---|---|---|---|---|---|---|---|
A |
2 |
150 |
100 |
162.50 |
— |
— |
12.50 |
0.1 |
B |
2 |
200 |
100 |
162.50 |
37.50 |
0.1875 |
— |
— |
C |
2 |
50 |
100 |
162.50 |
— |
— |
112.50 |
0.9 |
D |
2 |
250 |
100 |
162.50 |
87.50 |
0.35 |
— |
— |
Total |
|
650 |
400 |
650.00 |
125.00 |
|
125.00 |
1 |
Return Authorization
The return authorization, created from the sales order, is for half of item A and half of item C from the original sales order.
Item |
Qty |
Sales Amount |
Calculated FV Amount |
Revenue Amount |
Carve Out |
Carve Out Ratio |
Carve In |
Carve In Ratio |
---|---|---|---|---|---|---|---|---|
–A |
–1 |
–75 |
–50 |
–50 |
— |
— |
25 |
1 |
–C |
–1 |
–25 |
–50 |
–50 |
25 |
0.33333 |
— |
— |
Total |
|
–100 |
–100 |
–010 |
25 |
|
25 |
1 |
Merged Arrangement
When you merge the revenue arrangements from the sales order and the return authorization, the elements for related items are linked. The element for –A is linked to the one for A, and the one for –C is linked to the one for C.
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The Calculated FV Amount for the returned items –A and –C are prorated based on their return quantity. For more information, see Revenue Allocation for Returns.
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Positive and negative elements are combined to calculate the carve in and carve out ratios for all elements:
-
Combining A and –A results in a net sales amount of £75 and a net revenue amount of £91.66. The carve in for the net A items is £16.66.
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Combining C and –C results in a net sales amount of £25 and a net revenue amount of £91.66. The carve in for the net C items is £60.
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Items B and D do not have corresponding negative elements. Their sales and revenue amounts are carried over to the net sales and revenue amounts.
-
The effective carving ratios after combining positive and negative elements are:
A: Carve in 20%
B: Carve out 8%
C: Carve in 80%
D: Carve out 27%
-
Item |
Qty |
Sales Amount |
C |
Revenue Amount |
Net Sales Amount |
Net Revenue Amount |
Carve Out |
Carve Out Ratio |
Carve In |
Carve In Ratio |
---|---|---|---|---|---|---|---|---|---|---|
A |
2 |
150 |
100 |
183.33 |
75 |
91.66 |
— |
— |
16.66 |
0.20 |
B |
2 |
200 |
100 |
183.33 |
200 |
183.33 |
16.67 |
0.08 |
— |
— |
C |
2 |
50 |
100 |
183.33 |
25 |
91.66 |
— |
— |
66.66 |
0.80 |
D |
2 |
250 |
100 |
183.33 |
250 |
183.33 |
66.65 |
0.27 |
— |
— |
–A |
–1 |
–75 |
–50 |
–91.67 |
combined with A |
|||||
–C |
–1 |
–25 |
–50 |
–91.67 |
combined with C |
|||||
Total |
|
550 |
300 |
550 |
550 |
550.00 |
83.32 |
|
83.32 |
1 |
January Partial Billing
An invoice is generated in January, after the merge, for a portion of the sales order. The positive and negative elements are combined into a net item with a single carving ratio.
The carving ratios established with the merge are applied to the invoice. The allocation of the gross billing amount to individual revenue elements is shown in the following table. The amounts for the January carve in/carve out adjustment for each element’s deferred revenue account appear in the column on the right. As in the Projected Carve column of the revenue summary window, positive numbers indicate carve in amounts, and negative numbers show carve out amounts.
Item |
Invoice Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment This Period |
---|---|---|---|---|---|---|
A |
100 |
100 |
— |
1.40 |
101.40 |
1.40 |
B |
20 |
20 |
1.67 |
— |
18.33 |
–1.67 |
C |
30 |
30 |
— |
5.60 |
35.60 |
5.60 |
D |
20 |
20 |
5.33 |
— |
14.67 |
–5.33 |
|
170 |
170 |
7.00 |
7.00 |
170.00 |
0.00 |
January month-end adjustments, in addition to the carve in/carve out adjustment, are as follows:
-
Revenue recognition journal entry (run prior to reclassification)
-
Unbilled receivable adjustment for element level reclassification or net contract asset or liability per element for arrangement level
February Activity
In February, a credit memo posts the full amount of the earlier return authorization. Credit memos do not trigger carve in/carve out adjustments during reclassification. The carve out and carve in amounts shown in the following table are cumulative and coincide with the Deferred Revenue Reclassification report.
The negative posting is combined with the historical positive posting to derive the cumulative billing amounts.
Credit Memo
Item |
Credit Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment This Period |
---|---|---|---|---|---|---|
A |
–75 |
25 |
— |
1.40 |
26.40 |
0 |
B |
0 |
20 |
1.67 |
— |
18.33 |
0 |
C |
–25 |
5 |
— |
5.60 |
10.60 |
0 |
D |
0 |
20 |
5.33 |
— |
14.67 |
0 |
Total |
–100 |
70 |
7.00 |
7.00 |
70.00 |
0 |
February month-end adjustments are as follows:
-
Revenue recognition journal entry (run prior to reclassification)
-
Reversal of prior period’s unbilled receivable adjustment or net contract asset or liability per element
-
Unbilled receivable adjustment
March Activity
In March the remaining amount of the sales order is billed. Again, positive amounts are combined with all historical amounts (both positive and negative) to derive the gross cumulative billing amounts. The gross cumulative billing amount is then allocated based on the carving ratios to calculate the effective cumulative billing amounts.
The March carve in/carve out adjustment amounts for each element’s deferred revenue account appear in the column on the right in the following table. Positive numbers indicate carve in amounts, and negative numbers show carve out amounts.
March Final Billing
Item |
Invoice Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment This Period |
---|---|---|---|---|---|---|
A |
50 |
75 |
— |
16.66 |
91.66 |
15.26 |
B |
180 |
200 |
16.67 |
— |
183.33 |
–15.00 |
C |
20 |
25 |
— |
66.66 |
91.66 |
61.06 |
D |
230 |
250 |
66.65 |
— |
183.35 |
–61.32 |
|
480 |
550 |
83.32 |
83.32 |
550.00 |
0.00 |
March month-end adjustments are as follows:
-
Revenue recognition journal entry (run prior to reclassification)
-
Carve in/carve out adjustment
-
Reversal of prior period’s unbilled receivable adjustment
In April, only the final portion of the revenue remains to be recognized. The reclassification process does not create adjustments.