Revenue Recognition AR

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Revenue Recognition can be Challenging

Revenue Accounting What does it Mean?There are 2 aspects to accounting for revenue transactionsRevenue Recognition Accounting entries related to revenue1

Revenue Recognition can be Challenging

Revenue RecognitionRefers to the timing of booking revenue entries for sales transactions Governed by GAAP (Generally Accepted Accounting Principles) as well as industry-specific accounting pronouncements2

Revenue Recognition can be Challenging

Accounting for RevenueRelates to the determination of the appropriate revenue accounts for specific sales transactions In other words, when there is a sales transaction to account for, how is the revenue GL account determined?3

Revenue Recognition can be Challenging

Revenue Recognition Principles There are 4 basic revenue recognition criteria that must be met in order to recognize revenue: Persuasive Evidence of an Arrangement Exists Delivery has occurred Vendors Fee is Fixed or Determinable Collectibility is probable

Sound rather intimidating? What do these criteria mean? Lets take them one at a time 4

Revenue Recognition can be Challenging

Persuasive Evidence of an Arrangement Exists Refers to some type of legal evidence that a selling relationship exists between the vendor and the customer Typically, this evidence takes the form of a sales contract/agreement or a purchase order issued by the customer to the vendor

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Revenue Recognition can be Challenging

Delivery has Occurred Refers to completion of the delivery event Shipment of Product FOB Origin FOB Destination Delivery of Services Services are complete Completed Contract Accounting Percentage of Completion Accounting6

Revenue Recognition can be Challenging

Vendors Fee is Fixed or Determinable A pricing arrangement for the sales transaction exists whereby the price is fixed or determinable Pricing designated by contract Pricing identified in acknowledged purchase order

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Revenue Recognition can be Challenging

Collectibility is Probable Means that collection of the resulting receivable should be reasonably assured at the time the sale is made If a business sells to a customer that carries considerable credit risk or has a record of either slow or non-payment of invoices, then revenue recognition must be deferred until payment is received

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Revenue Recognition can be Challenging

So what does all this mean for your Oracle Apps Implemention? During the requirements gathering phase of your implementation, it is important to identify and understand the revenue-related accounting requirements for your business

Be sure to involve your Finance team and consider the revenue recognition principles described above as well as any industry-specific accounting pronoucements issued by the FASB (Financial Accounting Standards Board)

Take time to understand standard Oracle functionality Assess the match between Oracle and your business requirements analyze gaps9

Revenue Recognition can be Challenging Oracle Receivables Functionality:1. Revenue Recognition Accounting Rules Revenue Recognition Program System Options Settings Revenue Policy Event-Based Revenue Management

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Accounting for Revenue Transactions AutoAccounting Distribution Sets Revenue Accounting Feature

Revenue Recognition will occur on the AR Transaction GL Date in the absence of any revenue-related configurations10

Revenue Recognition can be Challenging Accounting Rules: When the requirement is to recognize revenue over multiple accounting periods, accounting rules define how revenue is to be allocated across periods Cannot be used when the Accounting Method defined in System Options is Cash Basis Essentially allow you to define Revenue Recognition Schedules for your AR Transactions Can define as many accounting rules as you need to manage your business activities11

Revenue Recognition can be Challenging Accounting Rules (contd): Can be associated with invoices imported using AutoInvoice or invoices created manually using the Receivables forms Default Accounting Rules can be associated with: Items (Invoicing tabbed region) Standard Memo Lines Order Types Sales Orders Service Contracts

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Revenue Recognition can be Challenging System Options: Accounting Method If you are using Accounting Rules, be sure to select Accrual as your accounting method

Revenue Policy For more complex revenue recognition scenarios, allows you to define the criteria around the deferral of revenue when using the Revenue Management Engine to make automated revenue recognition decisions on imported invoices If you do not define these options, Oracle will not attempt to make automatic revenue recognition decisions Criteria provided are: Standard Refund Policy Payment Term Threshold Credit Classifications 13

Revenue Recognition can be Challenging Revenue Recognition Program: A standard Oracle Receivables program used to generate the revenue distributions for invoices and credit memos that use Accounting Rules The program can be run on demand as a concurrent request When you run GL Interface, the Revenue Recognition Program is automatically run first. However, you should plan to run the Revenue Recognition Program periodically separate from the GL Interface. When submitted, the program selects all transactions with rules that have not been picked up in a previous submission The program creates the Revenue schedule for all accounting periods specified by the rule associated with each transaction line14

Revenue Recognition can be Challenging Event-Based Revenue Management: For more complex revenue recognition scenarios Works with invoices imported using AutoInvoice Automatically analyzes collectibility using the following criteria: Customer Credit Worthiness Contract Contingencies extended payment terms, non-standard refund policies and fiscal funding, forfeiture and acceptance clauses

Automatically makes the decision whether to initially distribute revenue to an Earned Revenue or Unearned Revenue account AutoAccounting then determines the GL account distributions15

Revenue Recognition can be Challenging AutoAccounting: AutoAccounting rules define how the segments of the accounting flexfield are derived for the following types of transaction distributions: Revenue Unearned Revenue Receivable Unbilled Receivable Freight Tax AutoInvoice Clearing

For each segment of your accounting flexfield, specify in Receivables AutoAccounting setups how Oracle should determine the segment value.

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Revenue Recognition can be Challenging AutoAccounting (contd): For Revenue AutoAccounting, the following sources (table name or constant value) may be used to determine the revenue account segments: Constant Value Customer Bill-To Site Salesperson Standard Lines (Standard Memo Lines or Inventory Item) Transaction Type

Use Constant Value when the value for the accounting flexfield segment should always be the same For any of the other table options, keep in mind that you must populate the values on each of these sources. For example, if you select Inventory Item as the source, you must populate the Revenue Account on each of your Inventory items.17

Revenue Recognition can be Challenging Revenue Accounting Feature This feature can be used to adjust revenue and sales credits at the transaction or transaction line level An Actions Wizard is provided to guide you through the adjustment process The Wizard can also be used to record early acceptance in revenue scenarios where there are contract acceptance contingencies Oracle Receivables also provides a Revenue Adjustment API to automatically make adjustments18

Revenue Recognition can be Challenging Revenue Accounting Feature (contd): The following actions can be performed using the Actions Wizard: Earn Revenue Unearn Revenue Revenue prior revenue adjustments Record early acceptance Add non-revenue sales credits Transfer revenue and non-revenue sales credits

The Wizard provides selection criteria to assist you in choosing the appropriate lines for revenue adjustment AutoAccounting provides the distributions for revenue adjustments Review and approval of the changes is also offered19

Revenue Recognition can be Challenging Integration with Other Modules Oracle Receivables integrates and receives transactions from several other modules such as: Order Management Service Contracts Projects

Therefore, revenue recognition and accounting requirements must be considered during the implementation and configuration of these modules as well20

Revenue Recognition can be Challenging Integration with Other ModulesOrder Management Service Contracts Projects

Invoice Distributions

Revenue Distributions Receivables

Transaction Distributions

General Ledger

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Revenue Recognition can be Challenging Order Management Typically, Order Management is used in scenarios where the shipment of product is the revenue recognition driver Be careful to consider whether product shipments to customers are FOB Origin or FOB Destination Revenue can be recognized on FOB Origin shipments at the time of shipment from your facility Revenue cannot be recognized on FOB Destination shipments until the product arrives at the customers location22

Revenue Recognition can be Challenging Order Management (contd) In FOB Destination situations, Oracle standard functionality does not offer a mechanism to delay revenue recognition and record the customer receipt event to trigger revenue recognition. When OM sends the order information to Receivables for billing, the revenue is scheduled to be recogn