1. Collecting General Ledger Data
  2. About Deliverable-Based Revenue Recognition

9 About Deliverable-Based Revenue Recognition

In Oracle Communications Billing and Revenue Management (BRM), you can set up revenue recognition that complies with the ASC 606 and IFRS 15 accounting standards.

Topics in this document:

About Revenue Recognition

Revenue recognition is an accounting principle and process for reporting revenue. It specifies when your company can recognize the money received from the products and services that you sell to your customers. BRM supports two types of revenue recognition:

  • Deliverable-based revenue recognition: Allows you to set up revenue recognition that complies with the Accounting Standards Codification (ASC) 606 and International Financial Reporting Standard (IFRS) 15 accounting standards. See "About Deliverable-Based Revenue Recognition".

  • Event-based revenue recognition: Allows you to use any revenue recognition scheme, including those supported in previous releases of BRM. See "About Event-Based Revenue Recognition".

The type of revenue recognition that BRM applies depends on whether a package or bundle that your customer purchases contains a deliverable. If the package or bundle:

  • Contains a deliverable, deliverable-based revenue recognition is applied to the purchase.

  • Does not contain a deliverable, event-based revenue recognition is applied to the purchase.

About Deliverable-Based Revenue Recognition

Note:

Deliverable-based revenue recognition:

BRM enables you to set up revenue recognition that complies with the ASC 606 and IFRS 15 standards. The core principle of these standards is that the amount of revenue that is recognized in a contract must match the amount of goods or services that are delivered to customers.

The ASC 606 and IFRS 15 standards have established a five-step process that governs revenue recognition for contracts:

  1. Identify the contract with the customer.

  2. Identify the performance obligations in the contract.

  3. Determine the transaction price.

  4. Allocate the transaction price to the performance obligations in the contract.

  5. Recognize revenue when the entity satisfies a performance obligation.

To comply with these standards, BRM distributes the selling price of a package or bundle proportionally across all of its goods and services. Prices are distributed according to their standalone selling price, even if a good or service is provided to a customer for free.

BRM determines how much revenue can be recognized by using:

About the Standalone Selling Price

In accounting, the standalone selling price is a rational and unbiased estimate of the potential market price of a good or service, such as $9 for an online movie or $30 per month for unlimited mobile data. Although it is an estimate of the potential market price, the standalone selling price does not always match what you charge your customers. For example, the price of a good or service may be higher due to increased demand or may be lower due to discounts or promotional offers.

BRM uses the standalone selling price to determine how to allocate revenue proportionally across multiple goods or services in a package or bundle.

The standalone selling price is defined in your deliverables. See "About Deliverables".

About the Revenue Earning Schedule

The revenue earning schedule specifies how the revenue is distributed and recognized over time. You define the type of earning schedule to use in your deliverables.

BRM supports these earning schedules:

  • Immediately: All of the revenue is recognized at once. For example, the revenue from the sale of an eBook is recognized when it is purchased by a customer.

    Use an immediate earning schedule when your company can fulfill a customer's order for the good or service before the purchase is sent to BRM for processing.

  • Linearly over a period of time: Revenue recognition is distributed across the commitment period, based on the allocation frequency. For example, a package with a one-year commitment term and a monthly frequency will have 1/12th of its revenue recognized each month.

    The commitment period is defined in your subscription terms. See "About Subscription Terms".

    The allocation frequency is defined in your deliverables. See "About Deliverables".

  • Milestone based: All of the revenue is earned when a milestone is reached, such as when a company technician installs a satellite TV dish at a customer's home or a physical product is shipped from the warehouse to the customer.

    To support a milestone-based earning schedule, you must configure your custom client application to call the contract management opcodes.

About Calculating the Revenue Allocation

BRM determines how to allocate revenue proportionally across multiple goods or services in a package by using:

  • The standalone selling price of each good or service in the package.

  • The relative value of each good or service in the package. For example, if a package includes goods A and B:

    • The relative value of good A = A/(A+B)

    • The relative value of good B = B/(A+B)

  • The contract's total price. The total price includes any flat discounts, but excludes the revenue from early termination fees, usage fees, and taxes.

    If your advertised price includes VAT taxes, BRM calculates the contract's total price without the tax.

To determine the revenue allocation for a good, multiply the relative value and the contract's total price.

For example, if the relative value of good A is 40% and good B is 60%, and the contract's total price is $200, the revenue allocation for good A is $80 (that is, 40% of $200) and the revenue allocation for good B is $120 (that is, 60% of $200).

About Deliverables

Deliverables define the type of good or service you are selling, its standalone selling price, its revenue earning schedule, and the revenue general ledger ID (G/L ID) to associate with financial transactions. You use deliverables to specify when and how much revenue can be recognized from a customer's purchase of a good or service.

You create deliverables for the following:

  • One-time activities: These are discrete services that are performed by your company or by your customers, such as a company installing a service at the customer's home. Deliverables for one-time activities have immediate or milestone-based earning schedules. You specify which one to use when you create the deliverable.

  • Physical goods: These are tangible products that you sell to your customers, such as DVDs, cell phones, and eBooks. Deliverables for physical goods have immediate or milestone-based earning schedules. You specify which one to use when you create the deliverable.

  • Metered services: These are services with limits on how much customers can use in a cycle, such as 100 free minutes or 20 eBooks a month. Deliverables for metered services have linear earning schedules.

  • Continuous services: These allow customers to use an unlimited amount of a service over a specified time period, such as unlimited data for a month or unlimited access to a website for a month. Deliverables for continuous services have linear earning schedules.

You do not create deliverables for usage charges.

To create deliverables, see "Configuring Deliverables" in PDC Creating Product Offerings.

After you create deliverables, you associate them with your charge offers.

About Subscription Terms

Subscription terms define the commitment period and options for canceling and renewing the goods and services you offer. For example, a subscription term could have a commitment period such as 1 month, 1 year, or 2 years. When you create a subscription term, you specify whether customers can cancel their subscriptions early and whether they incur any fees for doing so.

To create subscription terms, see "Creating Subscription Terms" in PDC Creating Product Offerings.

After you create subscription terms, you associate them with your packages and bundles.

About the Revenue from Usage Charges and Administrative Fees

The revenue generated from usage charges and administrative fees such as early termination fees, cannot be predicted ahead of time. These fees are not included when calculating a contract's total price or calculating the proportional price of each good or service in a package. Instead, your company recognizes the revenue from usage charges and administrative fees when customers pay for them.

To set up BRM to recognize revenue from usage charges and administrative fees:

  • Usage charges: You create a standard G/L ID for usage fees and associate it with a revenue general ledger account for credits.

  • Early termination fees: To track early termination fees separately, you must associate a revenue G/L ID with the early termination fees in your subscription terms.

    Alternatively, BRM can apply revenue from early termination fees across all deliverables in the customer's contract. For example, if a contract has a $200 early termination fee, deliverable A with a relative value of 20%, and deliverable B with a relative value of 80%, BRM applies $40 to deliverable A and $160 to deliverable B.

Sample Revenue Recognition Scenarios

This section describes how revenue would be recognized in the following simple scenarios:

Scenario 1: One-Year Contract with a Linear Earning Schedule

Your company offers a 1-year basic TV and internet service subscription for $59 per month with a $10 per month discount. There's also a $100 fee if a customer cancels the subscription after the first month.

Assuming a standalone selling price of $40 for the basic TV service and $25 for the internet service, you'd calculate the revenue allocation for the one-year contract like this:

  • The relative value of the basic TV service is 61.5% (that is, $40/($40 + $25)).

  • The relative value of the internet service is 38.5% (that is, $25/($40 + $25)).

  • The contract's total price is $588 (that is, ($59 * 12 months) – ($10 * 12 months)).

  • The revenue allocation is:

    • Basic TV service: $361.62 (that is, 61.5% of $588).

    • Internet service: $226.38 (that is, 38.5% of $588).

Assuming that the revenue is earned linearly over the monthly cycle period, the company would recognize this revenue:

  • For the basic TV service: $30.14 per month (that is, $361.62/12 months).

  • For the internet service: $18.87 each month (that is, $226.38/12 months).

If a customer cancels the contract after the first month, the company would recognize $100 immediately for the early termination fee.

Scenario 2: One-Year Contract for a Physical Good with Free Maintenance

Your company offers a computer with a year of free maintenance service for a promotional subscription price of $750.

Assuming a standalone selling price of $700 for the computer and $12 per month for the maintenance service, you would calculate the revenue allocation for the computer contract like this:

  • The standalone selling price of the contract is $844 (that is, $700 + [$12 * 12 months]).

  • The relative value of the computer is 83% (that is, $700/$844).

  • The relative value of the maintenance service is 17% (that is, $144/$844).

  • The contract's total price is $750.

  • The revenue allocation is:

    • Computer: $622.50 (that is, 83% of $750).

    • Maintenance service: $127.50 (that is, 17% of $750).

Assuming that the revenue from the computer is earned when the computer is shipped from the warehouse and the maintenance service is earned linearly over a monthly cycle period, the company would recognize this revenue:

  • For the computer: $622.50 when the computer is shipped from the warehouse.

  • For the maintenance service: $10.63 each month (that is, $127.50/12 months).

Setting Up Deliverable-Based Revenue Recognition

Setting up deliverable-based revenue recognition involves these high-level steps:
  1. Enabling deliverable-based revenue recognition in BRM. See "Enabling Deliverable-Based Revenue Recognition".
  2. Setting up your general ledger by:
    • Creating your general ledger accounts.
    • Creating your G/L IDs.
    • Assigning G/L IDs to your charges, discounts, tax codes, and so on.
  3. Creating deliverables, which define the goods and services that you sell to your customers. See "Configuring Deliverables" in PDC Creating Product Offerings.
  4. Associating deliverables with your charge offers. See "Configuring Charge Offers" in PDC Creating Product Offerings.
  5. Creating subscription terms, which define the commitment periods, cancellation options, and renewal options for your customers' contracts. See "Creating Subscription Terms" in PDC Creating Product Offerings.
  6. Creating bundles and packages for the products and services that you sell. See "Creating Bundles" and "Creating Packages" in PDC Creating Product Offerings.
  7. Associating your subscription terms with the bundles and packages that you sell to your customers.
You can run reports to view a summary of the totals in your G/L accounts. See "Generating General Ledger Reports".

Enabling Deliverable-Based Revenue Recognition

By default, BRM uses the event-based revenue recognition scheme. To use the deliverable-based revenue recognition scheme, you must enable the SSPRevenueRecognition business parameter in BRM and then associate deliverables with your charge offers.

Caution:

  • Your customers will not be able to cancel any packages or bundles that they purchased before you enabled the SSPRevenueRecognition business parameter. Cancel all of your customers' existing subscriptions before enabling the business parameter.

  • After you enable the SSPRevenueRecognition business parameter, you cannot disable it.

After deliverable-based revenue recognition is enabled, the following operations are not supported in BRM:

  • Performing future and backdated operations

  • Changing deliverable types

  • Using multiple G/L segments

  • Modifying existing contracts

  • Suspending contracts

  • Using complex discounts

    Only flat discounts that apply directly to the currency amount of cycle fees or purchase fees is supported. Discount grants on noncurrency resources and discounts based on resource values are not supported.

  • Using Conversion Manager

  • Using Account Migration Manager

  • Performing rerating

  • Transferring services

  • Performing multi-schema operations

  • Using the Web Services Manager opcodes

  • Performing accounts receivable (A/R) operations, such as adjustments and write-offs

To enable deliverable-based revenue recognition:

  1. Cancel all of your customers' existing subscriptions. See "Working with No-Contract Subscriptions" in Billing Care Help.

    Otherwise, your customers will not be able to cancel any packages or bundles that they purchased before you enabled the SSPRevenueRecognition business parameter.

  2. Go to BRM_home/sys/data/config.

  3. Create an XML file from the /config/business_params object: 

    pin_bus_params -r BusParamsBilling bus_params_billing.xml

  4. In the XML file, change the value for SSPRevenueRecognition to enabled: 

    <SSPRevenueRecognition>enabled</SSPRevenueRecognition>

  5. Load the XML file into the BRM database:

    pin_bus_params bus_params_billing.xml

  6. Stop and restart the CM.