Base Currency Transaction with Revenue Allocation

Important:

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.

Related Topics

Revenue Commitment Examples

Base Currency Transaction Without Revenue Allocation

Foreign Currency Transaction with Revenue Allocation

VSOE with Foreign Currency Revenue Commitment Example

Revenue Commitment with One-Time Revenue Item Example

General Notices