Carve In/Carve Out Adjustment Example Prospective Merge After Billing
The following example illustrates the carve in/carve out adjustments for a prospective merge after billing. In this example:
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A positive revenue arrangement from a sales order in January is prospectively merged in February with another positive revenue arrangement.
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The first sales order is partially billed in the first period (January).
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All transactions use U.S. dollars for the transaction and base currency.
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All revenue plans divide the revenue equally over three periods.
Activity for each month is as follows. Details are provided only for the carve in/carve out calculations.
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January Activity – Sales order, partial billing, revenue recognition, and reclassification
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February Activity – Sales order, prospective merge, revenue recognition, and reclassification
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March Activity – Final billings, revenue recognition, and reclassification
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April Activity – Revenue recognition and reclassification
January Activity
During January, the following transactions are created:
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Sales order and its revenue arrangement
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Invoice for a portion of the sales order
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Month-end revenue recognition and reclassification of deferred revenue
Sales Order 1 Revenue Arrangement
The sales order includes four items and no discount. Carving 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 |
1 |
120 |
100 |
112.50 |
7.50 |
0.0625 |
— |
— |
B |
1 |
180 |
100 |
112.50 |
67.50 |
0.375 |
— |
— |
C |
1 |
60 |
100 |
112.50 |
— |
— |
52.50 |
0.7 |
D |
1 |
90 |
100 |
112.50 |
— |
— |
22.50 |
0.3 |
Total |
|
450 |
400 |
450.00 |
75.00 |
|
75.00 |
1 |
January Invoice 1
In January, the sales order is partially billed. The carving ratios established for the sales order are applied to the invoice. The allocation of the gross billing amount to individual revenue elements is shown in the following table.
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 |
120 |
120 |
7.50 |
— |
112.50 |
–7.50 |
B |
— |
— |
— |
— |
— |
— |
C |
60 |
60 |
— |
5.25 |
65.25 |
5.25 |
D |
— |
— |
— |
2.25 |
2.25 |
2.25 |
|
180 |
180 |
7.50 |
7.50 |
180.00 |
0.00 |
The carve out for the item B element is skipped because there is no gross cumulative billing amount to carve from.
January month-end adjustments, in addition to the carve in/carve out adjustment, are as follows:
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Revenue recognition journal entry (run prior to reclassification)
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Unbilled receivable adjustment for element level reclassification or net contract asset or liability per element for arrangement level reclassification
February Activity
In February, another sales order is created for one item. The new revenue arrangement is added to the previous revenue arrangement using the prospective merge process.
Sales Order 2 Revenue Arrangement
The sales order is for a single item. When the revenue arrangement is created, it has only one element. Carving applies only to multi-element arrangements. Other values 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 |
---|---|---|---|---|---|---|---|---|
E |
1 |
150 |
100 |
150 |
— |
— |
— |
— |
Total |
|
150 |
100 |
150 |
— |
|
— |
|
Prospective Merge Revenue Arrangement 3
A prospective merge adds the revenue arrangement 2 to the residual values from the previous revenue arrangement 1. New revenue elements are created for the new prospective merge revenue arrangement. The discounted sales amount is the difference between the original discounted sales amount and the amount recognized at the end of the previous period. Since no revenue had been recognized for item E, its discounted sales amount is the same as its original discounted sales amount.
The prospective merge process uses a residual ratio to prorate other values in the prospective revenue arrangement. The residual ratio equals the amount recognized prior to the prospective merge divided by the original revenue amount. In the prospective merge arrangement, the quantity is the original quantity × (1 – the residual ratio). The other value in this example that is prorated and updated using a similar formula is the calculated fair value amount. (If the Recalculate Residual Fair Value had been checked, the calculated fair value for each element would be $100.)
The effective date of the prospective merge is February 1. This date is the first day of the first open period.
Item |
Qty |
Discounted Sales Amount |
Calculated FV Amount |
Revenue Amount |
Carve Out |
Carve Out Ratio |
Carve In |
Carve In Ratio |
---|---|---|---|---|---|---|---|---|
A |
0.6667 |
82.50 |
66.67 |
81.82 |
0.68 |
0.0085 |
— |
— |
B |
0.6667 |
142.50 |
66.67 |
81.82 |
60.68 |
0.505667 |
— |
— |
C |
0.6667 |
22.50 |
66.67 |
81.82 |
— |
— |
59.32 |
0.669224 |
D |
0.6667 |
52.50 |
66.67 |
81.82 |
— |
— |
29.32 |
0.330776 |
E |
1 |
150.00 |
100.00 |
122.72 |
27.28 |
0.181867 |
— |
— |
Total |
|
450.00 |
366.68 |
450.00 |
88.64 |
|
88.64 |
1 |
February Carve In/Carve Out Adjustment
After the prospective merge, the original locked revenue arrangement must have the same amounts billed and recognized. To accomplish this, all outstanding deferred revenue and unbilled receivable balances are carried over to the new prospective merge revenue arrangement. The carried-over deferred revenue balances are reallocated for the prospective merge revenue arrangement based on the new carve in and carve out ratios.
The first step in reallocating the deferred revenue balances is to reverse the prior carve in/carve out adjustment. The February carve in/carve out adjustment includes both prior period reversal lines and new lines for the current period. Details for the new lines are shown in the following table:
Item |
Invoice Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment This Period |
---|---|---|---|---|---|---|
A |
120 |
82.50 |
0.68 |
— |
81.82 |
–0.68 |
B |
— |
–37.50 |
— |
— |
–37.50 |
— |
C |
60 |
22.50 |
— |
0.46 |
22.96 |
0.46 |
D |
— |
–37.50 |
— |
0.22 |
–37.28 |
0.22 |
E |
— |
0.00 |
— |
— |
0.00 |
— |
|
180 |
30.00 |
0.68 |
0.68 |
30.00 |
0.00 |
Although the revenue element for item B has a carve out ratio, it has a negative cumulative billed element and cannot participate in carve out.
February month-end adjustments, in addition to the carve in/carve out adjustment, are as follows:
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Revenue recognition journal entry (run prior to reclassification)
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Unbilled receivable adjustment
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Net contract asset or liability per element for arrangement level reclassification
March Activity
In March the remaining amounts are fully billed. Positive amounts are combined with all historical amounts to derive the gross cumulative billing amounts. The gross cumulative billing amount is then allocated during reclassification based on the carving ratios to calculate the effective cumulative billing amounts.
March Invoices 2 and 3
Item |
Invoice Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment This Period |
---|---|---|---|---|---|---|
A |
— |
82.50 |
0.68 |
— |
81.82 |
— |
B |
180 |
142.50 |
60.68 |
— |
81.82 |
–60.68 |
C |
— |
22.50 |
— |
5.25 |
81.82 |
58.86 |
D |
90 |
52.50 |
— |
2.25 |
81.82 |
29.10 |
E |
150 |
150.00 |
27.28 |
— |
122.72 |
–27.28 |
|
420 |
450.00 |
88.64 |
88.64 |
450.00 |
0.00 |
March month-end adjustments, in addition to the carve in/carve out adjustment, are as follows:
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Revenue recognition journal entry (run prior to reclassification)
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Reverse unbilled receivable adjustment and net contract asset or liability per element adjustments
At the end of March, four of the five revenue elements are fully recognized. To complete the revenue arrangement, revenue must be recognized for the element for item E in April.