3Recognize Revenue

This chapter contains the following:

How Revenue Recognition Is Processed

Each accounting contract can have one or more performance obligations. Revenue is recognized based on satisfaction of the performance obligations.

Settings That Affect Revenue Recognition

Performance obligations are satisfied either at a point in time or over time.

  • Point in time: All revenue for the performance obligation is recognized at the point in time when it's fully satisfied.

  • Over time: Revenue is recognized incrementally as each portion of the obligation is satisfied.

Two key attributes determine the timing and amount of revenue that's recognized for each performance obligation.

Satisfaction Methods

Revenue Management provides two satisfaction methods, which work in combination with the satisfaction measurement model of a performance obligation to determine when to recognize the revenue.

Satisfaction Method Description

Require Complete

Revenue is recognized for the performance obligation when all promised details in the performance obligation have been completely satisfied.

Allow Partial

Revenue is recognized for the performance obligation incrementally as each portion of the obligation is satisfied.

Satisfaction Measurement Model

Use the satisfaction measurement models to:

  • Identify how a performance obligation will be satisfied.

  • Record the satisfaction measurements in the application when it's actually satisfied.

Revenue Management uses these satisfaction measurements to measure satisfaction events. Satisfaction events are used to recognize revenue.

Revenue Management provides three satisfaction measurement models:

Satisfaction Measurement Model Description

Measure Quantity Satisfied

Use this method when a customer is promised a specified quantity of goods or services as part of the performance obligation. The application creates a performance obligation satisfaction measurement event whenever a quantity of goods or services is delivered.

A performance obligation can have multiple satisfaction measurement events if partial quantities are delivered.

Measure Percentage Satisfied

Use this model when performance obligation satisfaction is measured as a percentage of the work completed. The application creates a performance obligation satisfaction event to specify the percentage of work that has been completed. Revenue is recognized in the same proportion as the work completed.

Measure Period Satisfied

Use this model when performance obligation satisfaction is measured by time periods satisfied. The application creates the performance obligation satisfaction event to specify the time period that was satisfied and the proportionate revenue for that time period.

When you use this model, the source application provides:

  • The satisfaction plan that specifies the total number of periods and the proportionate revenue for each period.

  • The plan start date and optionally, the plan end date of the time period over which the performance obligation will be satisfied.

  • The number of periods for the satisfaction plan if the satisfaction plan is variable.

The Recognize Revenue process creates the satisfaction measurement events for all of the periods in the satisfaction plan in advance.

Satisfaction Measurement Events

Satisfaction measurement events record the satisfaction progress of promised details. To recognize revenue, satisfaction measurement events must be created for the promised detail.

  • When the satisfaction measurement model is Measure Quantity Satisfied or Measure Percentage Satisfied, then satisfaction measurement events are created by source applications. For example, your order management application can send events based on the quantity shipped and accepted.

  • When the satisfaction measurement model is Measure Period Satisfied, then Revenue Management creates the measurement events using the satisfaction plan and the plan start and end dates provided by the source application on the promised detail. Revenue Management creates one satisfaction measurement event for each period in the satisfaction plan. If the satisfaction plan and dates aren't provided by the source application when the promised detail is linked to Revenue Management, then you must provide this information manually in the Manage Customer Contracts page.

How Revenue Is Recognized

Revenue is recognized when a performance obligation is fully satisfied (if the satisfaction method is Require Complete) or when it's partially satisfied (if the satisfaction method is Allow Partial).

The following table shows an example of three performance obligations and their details for a mobile phone plan.

Obligations Selling Amount Allocated Percentage Allocated Revenue Revenue Recognized Satisfaction Date Satisfaction Status as on 30-Jun-2016 Satisfaction Method

PO722-Handset

299.99

29.37

668.06

668.06

1-Jan-16

Fully Satisfied

Require Complete

PO740-Data Plan

1014.96

36.04

819.97

204.14

31-Dec-17

Extent Satisfied

Allow Partial

PO681-Talk and Text

960.00

34.59

786.92

195.91

31-Dec-17

Extent Satisfied

Allow Partial

Total

2274.95

2274.95

1068.11

In the example, assume the date is June 30, 2016. As of this date:

  • The satisfaction status for the Handset performance obligation is Fully Satisfied, because the satisfaction method is Require Complete, and all of the allocated revenue of $668.06 for the handset was recognized on the original transaction date of January 1, 2016.

  • The satisfaction status of the Data Plan performance obligation is Extent Satisfied, because the data plan has a satisfaction method of Allow Partial. This means that only $204.14 of the allocated amount of $819.97 has been satisfied as of June 30, 2016.

  • Similarly, the Talk and Text performance obligation has a satisfaction method of Allow Partial and the satisfaction status is currently Extent Satisfied. The revenue recognized amount of $195.91 is only a portion of the allocated revenue of $786.92.

Guidelines for Accounting in Revenue Management

Revenue Management integrates with Oracle Fusion Subledger Accounting, which is a rule-based accounting engine that centralizes accounting across applications. Subledger Accounting acts as an intermediate step between Revenue Management and Oracle Fusion General Ledger. Subledger Accounting enables you to create accounting in draft and final modes.

You can create multiple accounting representations for a single business event, which enables your enterprise to meet both corporate and local fiscal accounting requirements using primary and secondary ledgers.

Revenue Management:

  • Derives balance sheet accounts from Revenue Management System Options setup.

  • Derives revenue accounts in the following hierarchy:

    • Item or memo line

    • Bill-to site customer reference at the source document line

    • Bill-to site customer reference at the source document header

  • Derives appropriate accounts based on predefined events.

  • Performs accounting at the performance obligation level.

  • Uses conditional accounting to determine the balance sheet account offsets.

  • Tracks the difference between the billed amount and the allocated amount at the performance obligation level in a Discount Allocation Liability account.

Accounting for Customer Contracts and Performance Obligations

When you run the Revenue Recognition program, the program determines whether there are any eligible business events and creates any corresponding accounting events.

The following types of business events trigger the creation of accounting events:

  • Initial performance events

  • Satisfaction events

  • Billing events

  • Revisions and return events