Milestones, Carve-Outs,
Deferrals
Overcoming Revenue
Recognition Challenges
Options, Considerations and Lessons Learnt
Hans Kolbe, Celantra Systems Inc.; Vijay Gopal,
FormFactor Inc.
Northern CA User Group – OAUG Training Day 2010
Celantra Systems:
Celantra Systems provides international program management services with a strong focus
on multi-org, inter-company, global compliance and implementation issues. The key element
in our approach is the alignment of operational efficiency, legal/tax compliance and
management reporting. Our goals are:
- Single global structure across country, currency, language, accounting and tax regime
- Variations are transparent to operator and business user community
- Flexibility for business growth, acquisitions, or other changes in business or legal model
- Ease of support and upgrade
Former and current clients include Terex, UPS, Xerox, Tektronix, British Telecom, Assa
Abloy, Yahoo, Texas Instruments, PPG, Dionex and others.
Hans Kolbe has managed and advised software implementation projects for over 15, global
projects for over 10 years. His extensive knowledge on Oracle applications is combined with
a formal background as a German attorney, trained in international and comparative law.
Contact: e-mail hanskolbe@celantrasystems.com
Phone: + 1 (415) 730 - 1131
Topics
1. Challenges and Objectives in Revenue
Recognition automation
2. Flexible Milestones Rule Automation
3. Revenue ‘Carve-Out’ Requirements and
Solution Detail
4. Lesson Learnt
Current Business Model
- Client – located in Northern California - supplies high-tech
and semiconductor manufacturers with critical high value
testing instruments and support structure. This includes
customized configurations, installation, training, support, and
repairs.
- Currently all production and product shipment made from
California. Repair and service facilities exist in many Asian
and European countries.
- Key Asian customer countries are: Korea, Japan, Singapore,
Taiwan, China
- Oracle E-Business Suite with complete MFG and Financials
as well as CRM Service and Depot Repair implemented in the
US only. International entities report operational results in GL
journals only.
Revenue Recognition Challenges in
Multi-National Environment
BUSINESS REQUIREMENTS: Deferred Revenue and its Impact on Statutory
Profits:
*Future undelivered product (free goods)
*Future undelivered service (service contracts)
*Fees that will refund to customer based on future activity (NRE volume discounts)
*Collectability
*Customer acceptance provisions or functionality promises on delivered product
*Confirmation of final end-user (recognize on sell through, not sell-in)
*Insufficient evidence of arrangement (CRD reschedule documentation or
referenced exhibits not finalized)
Revenue Recognition Challenges
COGS IMPACT:
Deferred revenue related to undelivered product or service
requires no COGS deferral as the COGS are not yet incurred.
Deferred revenue related to fees that will refund and
collectability require no COGS deferral because deferred costs
do not meet the definition of an asset
Deferred revenue related to acceptance provisions, sell-through
confirmation and insufficient evidence would result in a deferral
of COGS.
Revenue Recognition Challenges
Current Status:
- All Revenue Recognition and COGS Adjustments are
done in manual adjustments at month end.
- Deferred Revenue is entered as AR Adjustment.
- Deferred COGS as GL Journal.
Business Requirement:
- Automation of Rev Recognition to support Shared
Services
- Speed up month end close.
- Provide easy reconciliation with Deferral of COGS
- Forecasting of Revenue Deferral
- Easy audit and reconciliation of Deferred and Recognized
Revenue
Revenue Recognition Challenges
Current Status:
- All Revenue Recognition and COGS Adjustments are
done in manual adjustments at month end.
- Deferred Revenue is entered as AR Adjustment.
- Deferred COGS as GL Journal.
Business Requirement:
- Automation of Rev Recognition to support Shared
Services
- Speed up month end close.
- Provide easy reconciliation with Deferral of COGS
- Forecasting of Revenue Deferral
- Easy audit and reconciliation of Deferred and Recognized
Revenue
Oracle Functionality Challenges
Fixed Length Revenue Recognition – Service Contracts:
• Functionality sufficient
Milestone Revenue Recognition:
• Accounting Rule without fixed recognition date?
• How to identify the critical event and integrate?
• How to setup multiple milestones for related order lines
and partial recognition
Carve-Outs – Revenue Deferral and Re-Allocation:
• Free Goods
• Free Services
• Future Volume Discounts
• Waiver for Fees
Implementation – Solution Elements
Fixed Length Revenue Recognition:
Business Cases:
- Service Contracts
- Payment Schedule Tie-In
Solution:
Create Accounting Rules for the various pre-determined
schedule (2yrs, 3yrs, 1yr) and amounts.
For Service Contracts it is possible to create specific items
with attached revenue recognition rules.
(this eventually was not used, because too many combinations of type and
length of service would be created)
Implementation – Solution Elements
Milestone Revenue Recognition:
Business Cases:
- Customer Acceptance (no fixed date)
- Certification of product (no fixed date)
- Collection Risk (tie to future payment – no fixed date)
Challenge: Oracle needs revenue recognition date to create
accounting rule. How to avoid creating accounting entries
for the future recognition date. These need to be manually
unscheduled when the recognition event occurs.
Solution: Accounting Rule record carries a flag “deferred“. If
this is checked, then no future date records are created.
This way no un-scheduling is required. Revenue
Recognition can be scheduled as events occur. Partial
scheduling is available (percentage or amount).
Note: Special case for milestone rules when related or bundled order lines are involved.
Implementation – Solution Elements
Carve Outs and Revenue Recognition:
Business Cases:
- Free Goods
- Free Services
- Future Volume Discounts
- Waiver for Fees
Definition:
Product accessories, design or installation fees, service
contracts are included in product price, i.e. bundled. No
separate charge is made. These related order lines carry
costs and must generate separate revenue (service
revenue etc.). The revenue must be ‘carved-out’ from the
main product revenue. This revenue re-allocation must
follow the revenue recognition rule of the main product.
Implementation – Solution Elements
Carve Outs and Revenue Recognition:
Oracle Challenge:
- No automated mechanism to apply revenue re-allocation
from related order lines.
- No automated mechanism to apply rev rec rule to a group
of order lines.
Solution Design Elements:
- Create Parent and Child Order line relationships
- Create data elements to maintain the ‘carve-out’ amounts
or percentages
- Build A/R interface preprocessor to generate additional
‘internal accounting invoices’ to execute revenue reallocation and ensure synchronized recognition
- Order Entry Control Reports, Forecasting and
Reconciliation Reports
Revenue Carve–Outs – Detail Setups
Parent/Child Relationship for Order Lines: Grouping DFF with 2
segments: a) Set No – to separate multiple sets on the same
sales order b) Parent or Child – only 1 parent but unlimited
children per set allowed.
Maintain ‘Carve-Out’ Amounts or percentages: Additional segment
DFF contains amounts or percentages as required. This is used
on the dependent children lines and allows the original order
sales price to remain as Zero for bundled items.
A/R Interface Preprocessor: Additional ‘internal accounting invoices’
are created in the A/R Interface. These invoices reduce ‘parent’
revenue and allocate revenue of dependent children lines
according to the required amounts. Separate invoice source
used, so invoices do not print and are not included on customer
statements.
Reports: Revenue forecast, order entry control and reconciliation
reports are created.
Revenue Carve–Outs – Detail Setups
Screen Shots Following – Partial
-
Revenue Recognition on Bundled and Carve-Out Sets
(excel model)
Deferred Revenue Reconciliation Report
Deferred Revenue Forecast
Inv
Number
Inv
Lin
e
Nu
m
Ord
er
Line
Nu
m
In
v
Qt
y
Unit
Selling
Price
Item
Num
P
a
r
e
n
t
C
hi
ld
R5210
A
P
1
N/A
7300001
C
1
NRE
C
R5210
A
C
7300001
C
10102518
1
1.1
1
58,000.
00
10102518
5
8.1
1
0.00
10102518
2
2.1
1
10,000.
00
10102518
3
3.1
1
0.00
Par
ent
Chi
ld
Grp
Appl
Meth
od
Accou
nting
Rule
Def
Re
v
Acc
t
Proj Rev Calc Amt
Functiona
l Amt
Recogniz
ed Amt
Deferred
Amt
51,260.00
58,000.00
51,260.00
0.00
PERCE
NT
0.00
0.00
0.00
0.00
1
VALUE
10,000.00
10,000.00
10,000.00
0.00
1
VALUE
0.00
0.00
0.00
0.00
Deferred Revenue Control Report - Reconciliation
10102518
4
4.1
1
0.00
1
PERCE
NT
0.00
0.00
0.00
0.00
Forecast – Deferred Revenue – Order Entry Control
Lesson Learnt
•
•
Revenue Recognition parameters were moved to Order Entry
from Month-End finance. Therefore stronger Integration of
Order Entry and Customer Service Process recommended.
Additional complexities with exception process need to be
addressed:
•
•
•
•
Order Changes and Cancellations
FX treatment in parent/child sets
Forecast and Reconciliation Reporting needs stronger emphasis
Prototyping and Faster Development cycle will enhance
meaningful user participation
Thank you !
Hans Kolbe, Celantra Systems
hanskolbe@celantrasystem.com
+ 1 (415) 730 - 1131