Contract Liability Proration Methods

You can establish date-range contract liability calculation method defaults at the system, business unit, or bill type level according to your business needs. These are the five methods for calculating contract liability that you define the recognition basis with a date range:

Term Definition

Method 1

Spread by days within range.

Method 2

Spread evenly across all periods.

Method 3

Spread evenly using a midperiod rule.

Method 4

Spread partial periods by days with remainder spread evenly.

Method 5

User-defined proration.

Method 1: Spread by Days Within Range

The system divides the number of revenue days that are in the period by the number of days that are in range. Accounting periods are based on a detail calendar. Revenue amounts may differ by period depending on the number of days that are in each period. The rounding difference is applied to the period with the largest revenue amount. For example:

  • Invoice amount: 12,000 USD.

  • Beginning date: 4/15/98.

  • Ending date: 4/14/99.

  • Total number of days in the range: 365.

    Period 1 2 3 4 5 6 7

    Detail calendar dates.

    4/4-5/5/98

    5/6-6/3/98

    6/4-7/3/98

    7/4-8/5/98

    8/6-9/3/98

    9/4-10/5/98

    10/6-11/4/98

    Number of days in accounting period.

    32

    29

    30

    33

    29

    32

    30

    Number of days in range per period.

    21

    29

    30

    33

    29

    32

    30

    Invoice amount revenue calc.

    12000 x (21 / 365)

    12000 x (29 / 365)

    12000 x (30 / 365)

    12000 x (33 / 365)

    12000 x (29 / 365)

    12000 x (32 / 365)

    12000 x (30 / 365)
    Period 8 9 10 11 12 13

    Detail calendar dates.

    11/5-12/3/98

    12/4-1/5/99

    1/6-2/3/99

    2/4-3/3/99

    3/4-4/5/99

    4/5-5/5/99

    Number of days in accounting period.

    29

    33

    29

    28

    33

    30

    Number of days in range per period.

    29

    33

    29

    28

    33

    9

    Revenue calc.

    12000 x (29 / 365)

    12000 x (33 / 365)

    12000 x (29 / 365)

    12000 x (28 / 365)

    12000 x (33 / 365)

    12000 x (9 / 365)

Method 2: Spread Evenly Across All Periods

The system divides the total invoice line amount by the number of periods in the range. Revenue is recognized in equal portions for each accounting period regardless of the number of days in each period. The rounding difference is applied to the first period.

Invoice line amount: 12,000 USD:

  • Beginning date: 4/15/98

  • Ending date: 4/14/99

  • Total number of accounting periods in the range: 13

    Period 1 2 3 4 5 6 7

    Detail calendar dates.

    4/4-5/5/98

    5/6-6/3/98

    6/4-7/3/98

    7/4-8/5/98

    8/6-9/3/98

    9/4-10/5/98

    10/6-11/4/98

    Revenue calc.

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13
    Period 8 9 10 11 12 13

    Detail calendar dates.

    11/5-12/3/98

    12/4-1/5/99

    1/6-2/3/99

    2/4-3/3/99

    3/4-4/5/99

    4/5-5/5/99

    Revenue calc.

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

    12000 x 1 / 13

Method 3: Spread Evenly Using a Midperiod Rule

The system applies rules to partially recognizable periods to determine whether they are fully recognizable or excluded from the calculations. The start and end dates, relative to the midperiod day, are used to determine whether the first and last periods are included or excluded. In the first period, if the start date is prior to the midperiod day, the entire period is fully recognizable. And, in the first period, if the start date falls after the midperiod day, no revenue is recognized. In the last period, if the end date is prior to the midperiod day, no revenue is recognized. In the last period, if the end date falls after the midperiod day, the period is fully recognizable. The rounding difference is applied to the first fully recognizable period.

Invoice details are:

  • Invoice line amount: 12,000 USD.

  • Beginning date: 4/15/98.

  • Ending date: 4/14/99.

  • Total number of accounting periods in the range: 13.

    Period 1 2 3 4 5 6 7

    Detail calendar dates.

    4/4- 5/5/98

    5/6- 6/3/98

    6/4 7/3/98

    7/4 8/5/98

    8/6 9/3/98

    9/4 10/5/98

    10/6 11/4/98

    Number of days in accounting period.

    32

    29

    30

    33

    29

    32

    30

    Number of days in range per period.

    21

    29

    30

    33

    29

    32

    30

    Revenue calc.

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12
    Period 8 9 10 11 12 13

    Detail calendar dates

    11/5 12/3/98

    12/4 1/5/99

    1/6 2/3/99

    2/4 3/3/99

    3/4 4/5/99

    4/5 5/5/99

    Number of days in accounting period.

    29

    33

    29

    28

    33

    30

    Number of days in range per period.

    29

    33

    29

    28

    33

    9

    Revenue calc.

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    12000 x 1 / 12

    0

In this example, the final period has nine revenue days. The system calculates the midperiod day of period 13 by dividing the number of days that are in the accounting period (30) by two. The midperiod day in period 13 is the 15th day of the period. Because nine is less than the midperiod day, no revenue is recognized in period 13.

Method 4: Spread Partial Periods by Days With Remainder Spread Evenly

The system calculates recognized revenue in steps. First, the system prorates partial periods by dividing the total number of days in the period by the total number of days in range. The revenue that is recognized for partial periods is deducted from the total. The remainder revenue is divided equally between the total number of fully recognizable periods.

Invoice details:

  • Invoice line amount: 12,000 USD.

  • Beginning date: 4/15/98.

  • Ending date: 4/14/99.

  • Total number of accounting periods in range: 13.

  • Total number of days in range: 365.

  • Number of revenue days in first period: 21.

  • Number of revenue days in last period: 9.

    Period 1 2 3 4 5 6 7

    Detail Calendar dates

    4/1-4/30/98

    5/1 -5/31/98

    6/1-6/30/98

    7/1 -7/31/98

    8/1 -8/31/98

    9/1 -9/30/98

    10/1 -10/30/98

    Number of days in accounting period

    30

    31

    30

    31

    31

    30

    30

    Number of days in range per period

    16

    31

    30

    31

    31

    30

    30

    Revenue Calc.

    A) Ivc Amt - 16 / 365

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11
    Period 8 9 10 11 12 13

    Detail Calendar dates

    11/1 - 11/30/98

    12/1 - 12/31/98

    1/1 - 1/31/99

    2/1 - 2/28/99

    3/1 - 3/31/99

    4/1 -4/30/99

    Number of days in accounting period

    30

    31

    31

    28

    31

    30

    Number of days in range per period

    30

    31

    31

    28

    31

    30

    Revenue Calc.

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    (Ivc Amt - (A + B)) x 1 / 11

    B) Ivc Amt x 9 / 365

  • Revenue recognized in first period: 12,000 USD x (16/365) = 526.03.

  • Revenue recognized in last period: 12,000 USD x (14 / 365) = 460.27.

  • Remainder to be divided evenly: 12,000 USD - (A + B) = 11,013.70.

  • Number of periods used to divide the remainder revenue: 13 - 2 = 11.

  • Revenue recognized in period 2 through 12: C / D = 11,013.70 / 11 = 1001.25.

  • Rounding difference: 12,000 - (526.03 + 460.27 + (1001.25 x 11)) = -.05.

  • Rounding difference applied to the partial periods: 460.27 -.05 = 460.22.

Note:

If you use this proration method, the BI_ACCT_ENTRY monthly values will not be identical to the original bill when you create credits in a month different than the original invoice.

Method 5: User-Defined Proration

Define the user-defined proration method to meet your specific business needs.