Carve In/Carve Out Adjustment Example Retrospective Merge Before Billing

The following example illustrates how the carve portion of revenue allocation works with the adjustment during reclassification. For background information, see the following topics:

In this example:

A positive revenue arrangement from a sales order is combined with a negative revenue arrangement from a return authorization by using a retrospective merge.
The merge occurs before any invoices or credit memos.
The transaction currency and base currency are the same, the pound sterling.
The revenue plans divide the revenue equally over four periods.

Details of the activity for each month are as follows:

January Activity – Sales order, return authorization, merge, partial billing, revenue recognition, and reclassification
February Activity – Credit memo, revenue recognition, and reclassification
March Activity – Final billing, revenue recognition, and reclassification
April Activity – Revenue recognition and reclassification (not shown)

January Activity

During January, the following transactions are created:

Sales order and its revenue arrangement
Return authorization and its revenue arrangement for a portion of the sales order
Retrospectively merged revenue arrangement combining the sales order and return authorization lines
Partial billing of the sales order
Month-end revenue recognition and reclassification of deferred revenue

Sales Order

The sales order includes four items and no discount. 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	2	150	100	162.50	—	—	12.50	0.1
B	2	200	100	162.50	37.50	0.1875	—	—
C	2	50	100	162.50	—	—	112.50	0.9
D	2	250	100	162.50	87.50	0.35	—	—
Total		650	400	650.00	125.00		125.00	1

Return Authorization

The return authorization, created from the sales order, is for half of item A and half of item C from the original sales order.

Item	Qty	Sales Amount	Calculated FV Amount	Revenue Amount	Carve Out	Carve Out Ratio	Carve In	Carve In Ratio
–A	–1	–75	–50	–50	—	—	25	1
–C	–1	–25	–50	–50	25	0.33333	—	—
Total		–100	–100	–010	25		25	1

Merged Arrangement

When you merge the revenue arrangements from the sales order and the return authorization, the elements for related items are linked. The element for –A is linked to the one for A, and the one for –C is linked to the one for C.

The Calculated FV Amount for the returned items –A and –C are prorated based on their return quantity. For more information, see Revenue Allocation for Returns.
Positive and negative elements are combined to calculate the carve in and carve out ratios for all elements:
- Combining A and –A results in a net sales amount of £75 and a net revenue amount of £91.66. The carve in for the net A items is £16.66.
- Combining C and –C results in a net sales amount of £25 and a net revenue amount of £91.66. The carve in for the net C items is £60.
- Items B and D do not have corresponding negative elements. Their sales and revenue amounts are carried over to the net sales and revenue amounts.
- The effective carving ratios after combining positive and negative elements are:
  
  A: Carve in 20%
  
  B: Carve out 8%
  
  C: Carve in 80%
  
  D: Carve out 27%

Item	Qty	Sales Amount	Calculated FV Amount	Revenue Amount	Net Sales Amount	Net Revenue Amount	Carve Out	Carve Out Ratio	Carve In	Carve In Ratio
A	2	150	100	183.33	75	91.66	—	—	16.66	0.20
B	2	200	100	183.33	200	183.33	16.67	0.08	—	—
C	2	50	100	183.33	25	91.66	—	—	66.66	0.80
D	2	250	100	183.33	250	183.33	66.65	0.27	—	—
–A	–1	–75	–50	–91.67	combined with A
–C	–1	–25	–50	–91.67	combined with C
Total		550	300	550	550	550.00	83.32		83.32	1

January Partial Billing

An invoice is generated in January, after the merge, for a portion of the sales order. The positive and negative elements are combined into a net item with a single carving ratio.

The carving ratios established with the merge are applied to the invoice. 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	100	100	—	1.40	101.40	1.40
B	20	20	1.67	—	18.33	–1.67
C	30	30	—	5.60	35.60	5.60
D	20	20	5.33	—	14.67	–5.33
	170	170	7.00	7.00	170.00	0.00

January month-end adjustments, in addition to the carve in/carve out adjustment, are as follows:

Revenue recognition journal entry (run prior to reclassification)
Unbilled receivable adjustment for element level reclassification or net contract asset or liability per element for arrangement level

February Activity

In February, a credit memo posts the full amount of the earlier return authorization. Credit memos do not trigger carve in/carve out adjustments during reclassification. The carve out and carve in amounts shown in the following table are cumulative and coincide with the Deferred Revenue Reclassification report.

The negative posting is combined with the historical positive posting to derive the cumulative billing amounts.

Credit Memo

Item	Credit Amount	Gross Cumulative Billing	Carve Out	Carve In	Effective Cumulative Billing
A	–75	25	—	1.40	26.40
B	0	20	1.67	—	18.33
C	–25	5	—	5.60	10.60
D	0	20	5.33	—	14.67
Total	–100	70	7.00	7.00	70.00

February month-end adjustments are as follows:

Revenue recognition journal entry (run prior to reclassification)
Reversal of prior period’s unbilled receivable adjustment or net contract asset or liability per element
Unbilled receivable adjustment

March Activity

In March the remaining amount of the sales order is billed. Again, positive amounts are combined with all historical amounts (both positive and negative) to derive the gross cumulative billing amounts. The gross cumulative billing amount is then allocated based on the carving ratios to calculate the effective cumulative billing amounts.

The March carve in/carve out adjustment amounts for each element’s deferred revenue account appear in the column on the right in the following table. Positive numbers indicate carve in amounts, and negative numbers show carve out amounts.

March Final Billing

Item	Invoice Amount	Gross Cumulative Billing	Carve Out	Carve In	Effective Cumulative Billing	Carving Adjustment This Period
A	50	75	—	16.66	91.66	15.26
B	180	200	16.67	—	183.33	–15.00
C	20	25	—	66.66	91.66	61.06
D	230	250	66.65	—	183.35	–61.32
	480	550	83.32	83.32	550.00	0.00

March month-end adjustments are as follows:

Revenue recognition journal entry (run prior to reclassification)
Carve in/carve out adjustment
Reversal of prior period’s unbilled receivable adjustment

In April, only the final portion of the revenue remains to be recognized. The reclassification process does not create adjustments.