Revenue Allocation for Returns
When some items in a sales transaction are returned for credit, their corresponding revenue must be reversed. These return events are linked to the original sales transaction. The corresponding revenue arrangement must be merged to establish the link for the negative return element. The allocation must also be adjusted.
Best practice is to merge a return revenue element only with a revenue arrangement that includes its associated sale revenue element. The return and sale revenue elements must have the same foreign currency exchange rate.
Negative revenue elements in a positive revenue arrangement are excluded from allocation unless they are linked to a positive revenue element. Such unlinked negative elements have their Allocation Type set to Exclude.
The following subtopics provide information about specific returns and general examples:
Return Authorizations
When return authorizations are created from sales orders, a new revenue arrangement is created with a negative revenue element for the return. The return automatically uses the same foreign currency exchange rate as the sales order. You can merge the new negative revenue arrangement with the existing revenue arrangement for the sales order only when the exchange rates are the same. When you merge, the negative element is automatically linked to the corresponding positive element only if the exchange rates match. This is important because the exchange rate on the return can be edited.
The Revenue Summary popup window provides a consolidated view of revenue elements in the arrangement that have been linked by the merge process or manually. For information, see Revenue Summary Details.
You can also merge the revenue arrangement from a stand-alone return authorization with an existing revenue arrangement for the sales order. Merging these arrangements is not required. However, if you do merge, the foreign currency exchange rates must be the same for both arrangements. For information, see Combination and Modification of Performance Obligations.
The calculated fair value amount for the negative element is a pro-rated share of the linked positive element based on quantity.
Credit Memos
When a credit memo is created from a return authorization, no additional revenue arrangement is generated.
Revenue arrangements are created for credit memos created directly from sales invoices and for stand-alone credit memo transactions. You can merge new revenue arrangements with one or more existing arrangements. You need to merge to link a credit memo revenue element to its related positive element. The foreign currency exchange rates of the negative elements and positive elements must be the same or the merge fails.
By default, revenue elements for stand-alone credit memos have the Allocation Type set to Exclude after a merge. If you link the credit memo element to a positive element in the same revenue arrangement, you must edit the Allocation Type to enable allocation.
Cash Refunds
When a cash refund is created from a cash sale, a revenue arrangement is created. You can merge the new revenue arrangement with one or more existing arrangements if the foreign currency exchange rates are the same. The merge is not required.
When you merge, the negative element is automatically linked to the corresponding positive element. The calculated fair value amount for the negative element is a pro-rated share of the linked positive element based on quantity.
Negative Element Allocation and Alternate Quantities
When revenue elements include an alternate quantities, allocation ratios for negative elements are based on both the quantity and the alternative quantity fields. When you link positive and negative revenue elements, if one element includes an alternate quantity value, both elements must include an alternate quantity value. The negative element quantity multiplied by alternate quantity may not exceed its linked positive element’s quantity multiplied by its alternate quantity.
Allocation Examples
Allocation combines the negative element with its related positive element in the revenue arrangement. The unit fair value is the same for the return element as for its related positive element. If there is no set fair value, as in percentage-based fair value, the return fair value is a prorated share of the calculated positive element.
The calculated fair value for a return element equals the calculated fair value for the return-of element multiplied by quantity returned divided by original quantity.
The calculated fair value for a return element is calculated differently if the revenue elements are partially recognized before the prospective merge. In this scenario, the calculated fair value for a return element equals the calculated fair value for the return-of element multiplied by the remaining quantity returned divided by the remaining quantity of the corresponding sold element.
Consider a scenario where you prospectively merge a revenue arrangement with a positive element, and the element’s quantity is zero after it has been fully recognized and returned. In this scenario, the positive element is part of the revenue allocation, but it has a calculated fair value amount of zero. For more information about prospective merges, see Prospective Merges.
Here is an example of the revenue arrangement for a sales order with four items.
Original Revenue Arrangement
|
Item |
Quantity |
Unit Price |
Sales Amount |
Fair Value |
Calculated FV Amount |
Allocation Ratio |
Allocation Amount |
|---|---|---|---|---|---|---|---|
|
A |
10 |
12 |
120 |
10 |
100 |
27.78% |
83.33 |
|
B |
20 |
3 |
60 |
5 |
100 |
27.78% |
83.33 |
|
C |
10 |
3 |
30 |
10 |
100 |
27.78% |
83.34 |
|
D |
10 |
9 |
90 |
20% of total sales |
60 |
16.67% |
50.00 |
|
Total |
|
|
$300 |
|
360 |
|
300.00 |
A return authorization makes a partial return of 5 units each for items B and D. The return of item B is at a different price. It is for $2 per unit instead of $3 per unit. This is what the merged revenue arrangement looks like. This example is for a retrospective merge.
Merged Revenue Arrangement
|
Item |
Quantity |
Unit Price |
Sales Amount |
Fair Value |
Calculated FV Amount |
Allocation Ratio |
Allocation Amount |
|---|---|---|---|---|---|---|---|
|
A |
10 |
12 |
120 |
10 |
100 |
32.79% |
80.33 |
|
B |
20 |
3 |
60 |
5 |
100 |
32.79% |
80.33 |
|
C |
10 |
3 |
30 |
10 |
100 |
32.78% |
80.32 |
|
D |
10 |
9 |
90 |
20% of total sales |
60 |
19.67% |
48.20 |
|
–B |
–5 |
2 |
–10 |
5 |
–25 |
–8.20% |
–20.08 |
|
–D |
–5 |
9 |
–45 |
prorated % of line D |
–30 |
–9.83% |
–24.10 |
|
Total |
|
|
$245 |
|
305 |
|
245.00 |
The calculations for the return lines in this example are as follows:
|
Element |
Calculated FV Amount |
|---|---|
|
Item –B |
–25 = –5 ÷ 20 × 100 |
|
Item –D |
–30 = –5 ÷ 10 × 60 |
Rounding errors are addressed during the final allocation steps. The revenue element with the greatest absolute allocation amount that is not excluded or a kit item is adjusted to correct the total.