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Revenue Recognition: Does Your Company still Have missing link within ERP?

Posted on April 25th, 2013 by Sanjit Anand ||Email This Post Email This Post

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Are you aware about the top three concerns for finance teams as

  1. Financial closing and reporting process
  2. Excessive use of spreadsheets
  3. and revenue recognition.

In key finding of survey conducted by www.RevenueRecognition , it was observed

  • 92% of public companies rely on manual processes to perform key revenue recognition and reporting functionality (nearly the same percentage is true for private companies).
    • 68% of all companies stated their Financials/ERP systems DO NOT automate all their revenue recognition and reporting activities.
    • 84% of companies that initially stated Financials/ERP systems DO automate revenue accounting are actually using spreadsheets for these activities.
  • The finance processes that are most difficult to establish internal controls for are contract management and revenue recognition.
  • Companies want to spend less time on data aggregation, manipulation, and validation and more time on business performance analysis.

dgreybarrow Issue with EXCEL

Using Excel as the “system of record” for managing revenue

The problems were…

  • Excessive time and effort to:
    • analyze and arrange an enormous amount of data
    • close the books
    • create journal entries
    • ensure accuracy
  • Increased time and effort to manage accounting controls
  • Inflexible reporting and analysis and the volume of data was growing

dgreybarrowMissing Link

92% of companies said above, they are using spreadsheets for one or more of the following key revenue recognition and reporting tasks:

  • Applying revenue allocation rules
  • Redistributing revenue (e.g. based on SOP 97-2, EITF 00-21)
  • Creating revenue recognition schedules for future periods
  • Reviewing sales orders to identify deferred items
  • Performing revenue contribution analysis
  • Reporting on future revenue streams
  • Creating accounting entries

Regardless of whether your company is private or public, does your organization recognize the importance of consistent and reliable revenue recognition ?

dgreybarrowRevenue Recognition

Revenue Recognition is Principle of accrual accounting that determines the period in which revenue is recognized

  • Revenue recognition is an earning process
  • There are rules and regulations on how and when you can recognize revenue
  • Under GAAP, there are four basic criteria:
    • Evidence of an arrangement exists (governing contract & PO)
    • Delivery has occurred (transfer title and risk of loss)
    • Fee is fixed or determinable (normal payment terms)
    • Collection is probable (customer has ability to pay)

Accounting terminology you may hear – FASB and IFRS guidelines, evidence of an arrangement, delivery, fixed fees, collection, software and non-software rules, multiple element arrangements, fair value (VSOE, BESP, TPE), relative selling price, revenue allocation, linked arrangements, acceptance, release events, contingencies, future upgrades, significant discounts, extended terms, software is essential to functionality, deferred revenue release, and so on….In other words – it’s HIGHLY TECHNICAL

dgreybarrow Revenue Requirements

Challenge that software companies face results from the volume and complexity of the revenue recognition guidance that such case, software arrangements include both software and services. The services could include installation, training, software design, or customization and modification of the software. If the services involve significant customization or modification of the software, then contract accounting under SOP 81-1 should be used for the arrangement.therefore , under such senario , Revenue Requirement should mainly focus on .

  1. Compliance
    • Calculate VSOE(Vendor-Specific Objective Evidence / ESP (Estimated Selling Price)
    • Manage VSOE/ TPE(Third Party Evidence)/ESP
    • Tolerances
  2. MEA (Multiple Element Arrangements)
    • Track MEA from multiple sources
    • Classify elements
  3. Revenue Recognition
    • Standalone sales
    • MEA
    • Rev rec carveouts according to VSOE/TPE/ESP
    • Deferrals & rev rec timing
    • COGSs
    • GL Posting
  4. Reporting
    • Revenue compliance
    • Billing and revenue reconciliation
    • Revenue forecasts
  5. Notifications
    • VSOE reference during pricing
    • Rev rec related notifications (approved exceptions, renewals, collectability status, etc.)

dgreybarrow Key Aspects in Revenue Requirements

  • User-defined Revenue Contingencies
  • Fair Value Analysis
  • Auto Accounting Rules
  • Amortization Methods

dgreybarrow EBS R12 Revenue Management Enhancements, filling the Gap of Missing Link

Organizations will also find that Oracle Financials R12 allows them to manage revenue with greater flexibility and improved accuracy.

  • Partial Period Revenue Recognition enables the generation of revenue recognition associated with contracts
  • Revenue Deferral Reasons based on events specific to an enterprise’s business practices
  • COGS and Revenue Matching synchronize the recognition of revenue with the associated COGS in compliance with Generally Accepted Accounting Principles
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