Using the Residual Method of Revenue Recognition

When a transaction includes an item with a vendor-specific objective evidence (VSOE) price that differs from its sales amount, VSOE prices are allocated to all items in the bundle. The allocation process uses the total sales amount of the transaction to assign a VSOE price to the bundle. The VSOE price allocated is the amount that is eventually recognized based on VSOE rules.

When VSOE prices are not known for one or more items in a bundle, the VSOE allocation may be determined if the bundle qualifies for the Residual Method of revenue recognition using SOP 98-9. SOP 98-9 amends part of SOP 97-2 and requires the recognition of revenue using the residual method in some circumstances.

The Residual Method can be used to determine the VSOE allocation for items if a bundle meets these conditions:

• All undelivered items have a VSOE price.

• One or more delivered items do not have a VSOE price.

• The total VSOE amount for undelivered bundle items is less than the total sales amount of the bundle.

For more information about using the residual method, see:

• Residual Method Calculation

• Discounts and the Residual Method

• Residual Method Examples

Residual Method Calculation

Using the residual method, the vendor-specific objective evidence (VSOE) allocation is calculated based on the fact that the total sales price of an item group must always equal the total VSOE allocation.

The formula used to calculate VSOE Allocation using the Residual Method is:

(total invoice amount of bundle -VSOE prices of undelivered items)

=amount to apply to delivered items lacking a VSOE Price in proportion to their invoice prices

When the total VSOE amount of a sale is known, NetSuite can calculate the VSOE value for qualifying individual items.

For example, you sell the following VSOE bundle:

The total sales amount of this transaction equals $20,000. Therefore, using the residual method, the VSOE allocation must equal $20,000 also.

When you apply the formula above, VSOE is calculated as follows:

total invoice amount of bundle ($20,000) -VSOE prices of undelivered items ($12,000)

=amount to apply ($8000)

Undelivered items have the same VSOE allocation as their VSOE price and the remaining amount of $8,000 becomes the VSOE allocation for the delivered software product, as follows:

If the bundle contains multiple items marked Delivered, the remainder is allocated proportionately to those items based on their sales prices.

Discounts and the Residual Method

When a discount is applied to a bundle, the discount may only be allocated to the delivered items in that bundle. Each delivered item must have an invoice price in order determine the allocation of the discount.

The Never flag can be used to prevent the allocation of discount to delivered items in the case of a specified upgrade. If the Permit Discount field on an item record is set to Never, then discounts are not applied to the item. For more information, read Setting Up VSOE on an Item Record.

Residual Method Examples

The following examples illustrate the use of the residual method of revenue recognition to determine the vendor-specific objective evidence (VSOE) allocation.

In the example below, the VSOE allocation is deferred for all items until the specified item is delivered. The items that are undelivered have a VSOE allocation equal to their VSOE price. The residual amount of $2000 becomes the VSOE allocation for the delivered product.

NetSuite does not allocate the VSOE price any items, pending the delivery of the Installation Service 202 item, which is marked Defer Bundle Until Delivered. When Installation Service 202 is delivered, VSOE prices are allocated based on residual method calculations.

In the next example, a residual amount is allocated between more than one delivered item:

In the next example, the residual amount is allocated between multiple delivered items for a bundle discounted 10%. None of the discount is applied to the undelivered item.

In the next example, the residual amount is allocated between multiple delivered items. The bundle includes a 10% discount and one of the delivered items has a Permit Discount setting of Never.

General Notices