Base Currency Transaction with Revenue Allocation
The functions discussed in this topic require the Revenue Commitments feature to be enabled.
This example illustrates the line level deferred revenue reclassification process as of Version 2013 Release 2. See Adopting Line Level Deferred Revenue Reclassification.
In this scenario, a sales order in base currency with bundled items requires revenue allocation.
You create a sales order on January 1 with the line items shown in the following table. Each item has its own revenue and deferred revenue accounts (Rev1, Rev2, Rev3, Rev4, DefRev1, DefRev2, DefRev3, and DefRev4). The carve in/carve out logic calculates the line level billing amount to allocate to the individual deferred revenue accounts.
Item |
Sales Amount |
VSOE Ratio |
Revenue Allocation |
Carve In Amount |
Carve In Ratio |
Carve Out Amount |
Carve Out Ratio |
---|---|---|---|---|---|---|---|
1 |
$100 |
0.25 |
60 |
0 |
0 |
40 |
0.4 |
2 |
$50 |
0.17 |
40 |
0 |
0 |
10 |
0.2 |
3 |
$50 |
0.38 |
90 |
40 |
0.8 |
0 |
0 |
4 |
$40 |
0.21 |
50 |
10 |
0.2 |
0 |
0 |
Total |
$240 |
1 |
240 |
50 |
|
50 |
|
-
The billing amounts for items 1 and 2 are larger than their revenue allocation amounts, so the excess billing amount must be allocated (carved out) to the other items based on their carve-out ratio. Items 1 and 2 give revenue to item 3 and 4 during revenue allocation. The carve-out ratio is calculated as (sales amount – revenue allocation amount)/sales amount when the sales amount is greater than the revenue allocation amount. When the sales amount is less than the revenue allocation amount, the carve-out ratio is zero.
-
Carve out amount from item #1 is $40, which is 40% of its original sales amount and its carve-out ratio.
-
Carve out amount from item #2 is $10, which is 20% of its original sales amount and its carve-out ratio.
-
The total carving amount on this order is $50 at the order level.
-
-
The billing amounts for items 3 and 4 are less than their revenue allocation amounts, so the difference needs to be recovered from the other items based on their carve-in ratio. Items 3 and 4 receive revenue from items 1 and 2 during revenue allocation. The carve-in ratio is calculated as gain from the carving on this item/total carving amount when the sales amount is less than the revenue allocation amount. When the sales amount is greater than the revenue allocation amount, the carve-in ratio is zero.
-
Item #3 takes $40, which is 80% of the total carving amount and its carve-in ratio.
-
Item #4 takes $10, which is 20% of the total carving amount and its carve-in ratio.
-
On January 20, you create an invoice to partially bill the order. This table shows how the billing amount allocation is calculated:
Item |
Account |
Invoice Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment Posted to Deferred Revenue |
---|---|---|---|---|---|---|---|
1 |
DefRev1 |
$50 |
50 |
20 |
|
30 |
–20 |
2 |
DefRev2 |
$20 |
20 |
4 |
|
16 |
–4 |
3 |
DefRev3 |
$30 |
30 |
|
19.2 |
49.2 |
19.2 |
4 |
DefRev4 |
$20 |
20 |
|
4.8 |
24.8 |
4.8 |
Total |
A/R |
$120 |
120 |
|
|
|
|
-
The gross billing amount for each item is shown in the Amount column, and the gross cumulative billing amount is in the next column.
-
The effective cumulative billing for each item is based on the carve in/out ratios and the gross cumulative billing amount as follows:
-
Item 1 gives $20 due to 40% carve-out ratio.
-
Item 2 gives $4 due to 20% carve-out ratio.
-
Total carved out amount is $24
-
Item 3 gets $19.2 due to 80% carve-in ratio.
-
Item 4 gets $4.8 due to 20% carve-in ratio.
-
-
The effective cumulative billing amount is equal to the line item deferred revenue balance before revenue recognition. (For example, for item 1 this is $30.)
-
The last column shows deferred revenue balance adjustment posting required for each item to reach the effective cumulative billing amount from the gross billing amount. A negative adjustment means debit, positive means credit. When billing has occurred over multiple accounting periods, this column shows only the net adjustment within the current period.
At the end of January, you post the following revenue recognition amounts. The last two columns show the actual posting to item-specific revenue and deferred revenue accounts.
Item |
Amount |
Cumulative Rev Rec |
Account |
Debit |
Credit |
---|---|---|---|---|---|
1 |
10 |
10 |
DefRev1 |
10 |
|
|
|
|
Rev1 |
|
10 |
2 |
30 |
30 |
DefRev2 |
30 |
|
|
|
|
Rev2 |
|
30 |
3 |
70 |
70 |
DefRef3 |
70 |
|
|
|
|
Rev3 |
|
70 |
4 |
20 |
20 |
DefRev4 |
20 |
|
|
|
|
Rev4 |
|
20 |
Total |
130 |
130 |
|
|
|
At the end of January, the total billing amount on this order is $120, and the total revenue recognition amount is $130. Because revenue recognition exceeds billing, the reclassification process makes this unbilled receivable adjustment:
Month-end adjustment |
January |
|
---|---|---|
Account |
Debit |
Credit |
Unbilled A/R |
10 |
|
Deferred Revenue System |
|
10 |
After this adjustment, the ending account balances for January are as follows:
Ending Balance |
January 31 |
---|---|
A/R |
120.00 |
Rev1 |
10.00 |
Rev2 |
30.00 |
Rev3 |
70.00 |
Rev4 |
20.00 |
Total Revenue |
130.00 |
DefRev1 |
20.00 |
DefRev2 |
–14.00 |
DefRev3 |
–20.80 |
DefRev4 |
4.80 |
Deferred Revenue System |
10.00 |
Total Deferred Revenue |
0.00 |
Unbilled A/R |
10.00 |
Notice that the order level total deferred revenue balance is 0 (20 – 14 – 20.8 + 4.8 + 10) and the unbilled receivable is $10.
On February 20, you create another invoice. This triggers the same billing amount allocation logic:
Item |
Account |
Invoice Amount |
Gross Cumulative Billing |
Carve Out |
Carve In |
Effective Cumulative Billing |
Carving Adjustment Posted to Deferred Revenue |
---|---|---|---|---|---|---|---|
1 |
DefRev1 |
$50 |
100 |
40 |
|
60 |
–20 |
2 |
DefRev2 |
$20 |
40 |
8 |
|
32 |
–4 |
3 |
DefRev3 |
$15 |
45 |
|
38.4 |
83.4 |
19.2 |
4 |
DefRev4 |
$20 |
40 |
|
9.6 |
49.6 |
4.8 |
Total |
A/r |
$105 |
225 |
|
|
|
|
-
With two invoices on this order:
-
Item 1 has $100 gross cumulative billing, which is $60 effective cumulative billing after carve out.
-
Item 2 has $40 gross cumulative billing, which is $32 effective cumulative billing after carve out.
-
Total carved amount is $48
-
Item 3 has $45 gross cumulative billing, which is $83.4 after carve in.
-
Item 4 has $40 gross cumulative billing, which is $49.6 after carve in.
-
The last column shows the net deferred revenue adjustment in February. This is in addition to the adjustment in January. For example, for item 1, the previous month’s difference between the gross and effective cumulative billing was –20. For the current month the difference is –40. Therefore, the additional adjustment needed to reach the effective billing amount for item 1 is –20.
-
At the end of February, you post another set of revenue recognition amounts:
Item |
Amount |
Cumulative Rev Rec |
Account |
Debit |
Credit |
---|---|---|---|---|---|
1 |
30 |
40 |
DefRev1 |
30 |
|
|
|
|
Rev1 |
|
30 |
2 |
5 |
35 |
DefRev2 |
5 |
|
|
|
|
Rev2 |
|
5 |
3 |
20 |
90 |
DefRef3 |
20 |
|
|
|
|
Rev3 |
|
20 |
4 |
10 |
30 |
DefRev4 |
10 |
|
|
|
|
Rev4 |
|
10 |
Total |
65 |
195 |
|
|
|
The total billing amount at the end of February is $225, and the revenue recognition amount is $195. Billing now exceeds revenue recognition, and the previous unbilled receivable adjustment is reversed:
Month-end adjustment |
February |
|
---|---|---|
Account |
Debit |
Credit |
Unbilled A/R |
|
10 |
Deferred Revenue System |
10 |
|
The ending account balances for February are as follows:
Ending Balance |
February 28 |
---|---|
A/R |
225.00 |
Rev1 |
40.00 |
Rev2 |
35.00 |
Rev3 |
90.00 |
Rev4 |
30.00 |
Total Revenue |
195.00 |
DefRev1 |
20.00 |
DefRev2 |
–3.00 |
DefRev3 |
–7.00 |
DefRev4 |
20.00 |
Deferred Revenue System |
0.00 |
Total Deferred Revenue |
30.00 |
Unbilled A/R |
0.00 |
When the order is fully invoiced and recognized, all deferred revenue and unbilled receivable accounts will have a zero balance.