Contingent Revenue Handling
Advanced Revenue Management (Revenue Allocation) supports contingent revenue handling for professional service items. Contingent revenue handling stipulates that the allocated revenue for delivered items cannot be contingent on the delivery of additional items or other specified performance. This prevents over-allocating revenue for recognition purposes.
Contingent revenue handling compares the ratio of the fair value of eligible items to the ratio of the discounted sales amount of those items. When the fair value ratio is greater, the system does not allocate revenue for the transaction. Revenue is recognized based on the sales amount of the items.
The Enable Contingent Revenue Handling preference controls the availability of contingent revenue handling. This is a book-level preference. When Multi-Book Accounting is enabled, the Enable Contingent Revenue Handling box appears on each accounting book record. Otherwise, the preference is in the Revenue Recognition group on the General subtab of the Accounting Preferences page. For more information, see Setting Advanced Revenue Management (Essentials) Preferences.
When contingent revenue handling is enabled, an Eligible for Contingent Revenue Handling box is included on the Revenue Recognition/Amortization subtab on item records. Unless this box is also checked, contingent revenue handling is not enforced. Eligible for Contingent Revenue Handling is also added to the revenue element when the box is checked for the item.
In the following example, the revenue arrangement includes subscription items and professional services. The professional services item has the Eligible for Contingent Revenue Handling box checked.
|
|
Discounted Sales Amount |
Fair Value |
Preliminary Allocated Value |
Final Allocated Value |
|---|---|---|---|---|
|
Subscription Items |
$ 65,000 |
$ 40,000 |
$ 61,600 |
$ 65,000 |
|
Professional Services |
12,000 |
10, 000 |
15,400 |
12,000 |
|
Total |
$ 77,000 |
$ 50,000 |
$ 77,000 |
$ 77,000 |
|
PS Ratio |
16% |
20% |
20% |
16% |
Professional services are 16% of the total order (12,000 ÷ 77,000). The ratio of the fair value amount for professional services is 20% of the order (10,000 ÷ 50,000). Using the fair value ratio, the preliminary allocated revenue amount for professional services is $15,400. This amount exceeds the transaction amount of $12,000 and triggers contingent revenue handling. The final revenue allocation for professional service is based on the $12,000 sales amount.
If the Eligible for Contingent Revenue Handling box is checked for multiple elements in a revenue arrangement, those revenue elements are considered as a group. If their combined fair value ratio is greater than their combined sales ratio, contingent revenue handling is triggered. A single eligible revenue element may have a greater fair value ratio without triggering contingent revenue handling.
In the following examples, Case 2 does not trigger contingent revenue handling, but Case 3 does.
|
Case 2 |
|||||
|---|---|---|---|---|---|
|
|
Discounted Sales Amount |
Sales Ratio |
Fair Value |
Fair Value Ratio |
Final Allocated Value |
|
Service A |
$ 100 |
.6667 |
$ 100 |
.6452 |
$ 64.52 |
|
Service B |
100 |
200 |
129.03 |
||
|
Other C |
100 |
.3333 |
165 |
.3548 |
106.45 |
|
Total |
$ 300 |
|
$ 465 |
|
$ 300 |
In Case 2, the combined fair value ratio is less than the combined sales ratio for the two service items, and allocation proceeds as normal.
|
Case 3 |
|||||
|---|---|---|---|---|---|
|
|
Discounted Sales Amount |
Sales Ratio |
Fair Value |
Fair Value Ratio |
Final Allocated Value |
|
Service A |
$ 100 |
.6667 |
$ 100 |
.7143 |
$ 100 |
|
Service B |
100 |
200 |
100 |
||
|
Other C |
100 |
.3333 |
120 |
.2875 |
100 |
|
Total |
$ 300 |
|
$ 420 |
|
$ 300 |
In Case 3, the combined fair value ratio is greater than the combined sales ratio for the two service items. The discounted sales amount for each item becomes its final allocated value.
If all of the revenue elements in an arrangement are eligible, contingent revenue handling is not triggered.
By default, the revenue arrangement header does not display information about contingent revenue handling. However, you can customize the transaction form to display a box called Contingent Revenue Handling Triggered. The box is checked automatically when the conditions are met that trigger contingent revenue handling.