Under Generally Accepted Accounting Principles (GAAP), deferred revenue, sometimes called unearned revenue.

Deferred revenue is a liability that is created when monies are received by a company for goods and services not yet provided.

What is the deferred revenue?

Deferred revenue is a liability that is created when monies are received by a company for goods and services not yet provided.

Revenue will be recognized, and the deferred revenue liability eliminated, when the services are performed.

Deferred revenue stems from the accounting concept of revenue recognition, under which revenues are recognized only when the earnings process is complete. If funds are received and no goods or services have yet been provided, the process is not complete; thus revenue cannot be recognized, and a deferred revenue liability is recorded.

Specifically, the deferred revenue account is credited, and cash (or otherassets) are debited. Please take a note deferred revenue is recorded in specific industries under particular circumstances.

Deferred Revenue Example

Like many subscription businesses, A internet Hosting company offers a plan to pay upfront for whole year.

Since deferred revenue represents the value of the services that are left to be delivered at a point in time, if you purchased the annual plan, $2400 would be added to both the cash account of the balance sheet and the deferred revenue line. Every month $200.00 would be moved out of deferred revenue and reported as revenue on the income statement.

Understand why you need to defer revenue.

Why can't you just record the revenue when you actually receive the cash payment? By doing so , this would violate the principles of accrual-based accounting.

There are 2 principles which provide the foundation for accrual accounting.

1. The first is the matching principle. Under the matching principle, revenues and expenses that correspond to each other must be recorded in the same accounting period. Using the insurance example above, you cannot recognize all the revenue in January, because there will be expenses associated with that insurance coverage incurred throughout the year. These expenses must be matched with their corresponding revenues.
2. The second is the revenue recognition principle. This principle dictates that revenues should only be recorded when they are both realized (or realizable) and earned. "Realized" revenues are those for which a claim to cash has been received, and "earned" revenues are those for which a good or service has been rendered.

The implication, then, is that you cannot simply record a revenue whenever cash is paid to your company. If, for example, a client is prepaying for a continuing service, then you cannot recognize that payment as revenue until you actually render the service. Until then, the payment represents a liability, or an obligation to the client. This makes sense to you.

Governing Rule

For revenue to be recognized (earned), SEC have SAB 101/104 sets four key conditions that must be met:

1. Persuasive evidence of an arrangement exists,
2. Delivery has occurred or services have been rendered,
3. The seller's price to the buyer is fixed or determinable, and
4. Collectability is reasonably assured

Understanding the Deferred Revenue Accounting Process

You can create and send invoices for products or services that you will deliver in the future or over a range of time.

Invoice details:

• Bill line amount: 6000.00 USD.
• Invoicing Rule = Bill in Advance
• Invoice Date 2-DEC-12
• GL Date 2-DEC-12
• Accounting Rule:Type: Accounting, Fixed Duration
• Period : Monthly
• Number of Periods : 6

Here is accounting Posting

Finally

Keep in mind that deferred revenue generally means that cash has been received by the seller, so the remaining concern is determining when the cash is recognized as earned revenue. Within GAAP, there are multiple methods that can be used to recognize revenue. Depending upon which method is chosen, the financial statements may look drastically different even though economic reality remains the same.

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.

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

Missing 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 ?

Revenue 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

Revenue Requirements

Challenge that software companies face results from the volume and complexity of the revenue recognition guidance that exists.in 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.)

Key Aspects in Revenue Requirements

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

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

VAT is an important component of the China Government’s entire taxing regime.

China mandates that Value Added Tax calculation, invoice generation, and reporting to tax authorities be done by Chinese certified software certified as “Golden Tax”. Through partnership with Hangtian, a software company for “Golden Tax” software, Oracle R12 offers a plug-and-play interface between Oracle AR and Golden tax system which is called Golden Tax Adaptor.

The official VAT is computed and official VAT invoices as well as reporting of collected VAT to the Chinese tax authorities can be entered and generated in the golden tax system. Information is then sent back through the Golden Tax Adaptor to Oracle AR where collection and accounting are actually done.

The Golden Tax project refers to an integrated nationwide value-added tax (VAT) monitoring system and was launched in a bid to establish a national computerized taxation network. Under this Golden Tax project, all businesses operating in Mainland China are required to use a government certified tax software referred to as the Golden Tax software for generating VAT invoices, VAT calculation, and statutory tax reporting. Chinese government policy requires all businesses to issue all VAT invoices through this Golden Tax system.

Invoice printing VAT Invoices is legal Requirement in China.

Golden Tax Adaptor

In Mainland China it is mandatory to use government authorized software, called Aisino Golden Tax system , for generating VAT invoices and statutory tax reporting.

Golden Tax Adaptor provides seamless integration between Oracle Receivables and the interface of Aisino Golden Tax software and streamlines the process of creating VAT invoices against the Receivables documents to make sure data consistency between Oracle Receivables and the Golden Tax software.

The preceding diagram illustrates the integration of Golden Tax Adaptor with the Aisino Golden Tax System.

Key points about the Golden Tax Adaptor are:

Golden Tax Process

This feature is built on top of Oracle Accounts Receivable and Oracle E-Business Tax.

The key processes for a typical workflow are as below:

1. Create receivables invoices manually or by using auto-invoice from Oracle Order Management.
2. Transfer receivables transactions to the Golden Tax Adaptor.
3. Modify the data in the Adaptor using the Golden Tax Invoice Workbench.
4. Consolidate multiple invoices to an invoice based on the Consolidation rule.
5. Export the invoice information either from the Golden Tax Invoice Workbench or a separate concurrent program.
6. Import the flat file into the Aisino Golden Tax System (perform this activity in the Golden Tax software.)
7. Generate corresponding VAT invoices in the Aisino Golden Tax System (perform this activity in the Golden Tax software.)
8. Export the VAT invoice information from the Aisino Golden Tax System (perform this activity in the Golden Tax software.)
9. Import the VAT invoices data file back into the Golden Tax Adaptor.

Hope this helps.

Do you know in R12, there is Customer-centric functionality called "Customer Acceptance".This is Integrated with Workflow in OM and AR and utilizes Order Information Portal (OIP) .

Company using these feature can see major benifits as:

• This is Customer-focused enhancement which improve Customer Satisfaction
• Self-service acceptance entry by Customer
• Delayed invoicing can reduce transaction burden of processing RMA

What is Customer Acceptance ?

• Enables organization to defer invoicing and/or revenue recognition for the shipped goods till the end customer receives the shipment and accepts the material
• Additional step called ¡§customer acceptance has been introduced in order fulfillment flow in R12, where customer accepts the goods either before or after billing happens
• Customer Acceptance rules are created in the Receivables Revenue Management module and they are executed and validated within Order Management

Types of Customer Acceptance Rules

Customer Acceptance can be performed at the following milestones:

• Prior to Invoicing - Pre Billing
• Post Invoicing - Post Billing

Oracle supports both Customer Acceptance rules in both Implicit and Explicit mode. Details are herewith:

1. Pre-Billing Acceptance:

Invoice is generated after the acceptance criterion is met; either a certain period of time has elapsed since shipment (Implicit Acceptance) or a user records acceptance using Order Information portal (Explicit Acceptance). Events are most likly to be:

Remember this "Line closes and invoice-interfaces after acceptance "

2. Post-billing Acceptance:

Invoice is generated upon delivery of goods/ services but the revenue recognition is deferred until the customer accepts the products/ services. Acceptance may be recorded implicitly / explicitly at the line level.Events are most likly to be:

Remember this "Revenue recognition occurs after acceptance"

Two Basic Types of Acceptance

Oracle has broadly classified the acceptance in two categories:

1. Explicit Acceptance

Requires an actual acceptance from or on behalf of the Customer.Acceptance is recorded using the Order Information Portal

• Customers or their representative can perform the acceptance by
• Logging into the Self-service Order Information portal
• Through import API
• Recording the acceptance in sales order form
• Acceptance can be recorded Manually or Programmatically

2. Implicit Acceptance:

In this case, acceptance will auto-process after specific interval beyond specified transaction.

Acceptance is recorded systemically after a certain period of time has elapsed since the shipment. This period of time is setup in the Receivables module at the time of defining the deferral reason.

• In the Receivables module, The Expiration Period (Expire Days) is pre defined for the Deferral Reasons
• Implicit Acceptance Request Set is used to record implicit acceptance
• Can only be recorded Programmatically

This make total 4 Acceptance Combinations as:

• Pre-Billing Explicit
• Pre-Billing Implicit
• Post-Billing Explicit
• Post-Billing Implicit

Basic Set Up

In order to use this , Important setups required for Customer Acceptance feature along with Revenue Recognition as follows:

• Setting Up Oracle Order Management System Parameters
• Adding Specific Functions to Order Management User Menu
• Create Revenue Contingencies & Assignment Rules
• Create Folder for viewing Customer Acceptance details on Sales Order Line

A note on Implicit Acceptance Request Set

The Implicit Acceptance Request Set, a part of OM’s standard concurrent programs is launched upon expiration of ‘Acceptance Days’ and acceptance is recorded.

This request Set has two concurrent requests

1. Generate Pre-billing Acceptance Program for Pre-billing, Implicit Acceptance
2. Revenue Contingency Analyzer for Post-billing, Implicit Acceptance

Customer Acceptance can be a useful tool for improving customer satisfaction by delaying invoicing until goods or services are accepted and hopefully, utilized to maximize the benefit.

In response to a reader's query here is small note on EBS refund functionality.

Refund processing for the Supplier and Employee

When a supplier or employee sends a refund for an invoice payment that have made, record the refund can be recorded in Payables. A refund closes out an outstanding credit balance, so you are actually making a negative payment for a credit balance. The credit balance can consist of the outstanding balance of any combination of the following documents, as long as the sum is negative and equals the refund amount:

• Invoices
• Debit memos
• Credit memos
• Expense report

Paying these documents with a refund records each document as paid, and gives you a complete supplier transaction history.

Refund processing for the Customer

R12 There are two refund Options Available

1. Initiation of a customer refund by application of a credit or unapplied cash to a refund receivables activity
2. Automated refund generation based on credit memos generated by Auto invoice
   • Check refunds
   • Credit card refunds

In R12, the refund process has been automated for non-credit card transactions from Oracle AR module. For credit card transactions, refunds are applied to the same credit cards used on the transactions in Account Receivables. For non-credit card transactions, refunds are processed via AP. Receivables submit the refund request to AP, and in turn AP transacts refunds via Oracle Payments after gong through the approval process. To view the status of the refund, one can select the button "Refund Status" off the Receipt Application window which brings to the AP workbench. Following are the Refund process generated at receivable and then pass to payable to further processing and payment

Those who does not use Oracle AR as receivable, the refund data with customer basic information are fed into the Payable invoice where Customer will be created as one time supplier with minimum setup and check will be generated against the invoices created from refund data.

In case if you need some more thoughts on setup and steps , drop me offline

Do you know In R12 , there is New Public API’s for Business Objects, which can be used with a single API call. This Covers a total of 16 objects
of 4 Composite objects as

• Person
• Organization
• Person Customer
• Organization Customer

It also covers granular objects like Customer Account, Address etc.

There are four action avaiable in these API's as Create / Update / Save / Get
This provides API’s to Map Business objects in TCA to Source system identifier of other systems.

Public API for logical Person is HZ_PERSON_BO_PUB

• create_person_bo – Creates person related elements
• update_person_bo – Updates person related elements
• save_person_bo – Saves person related elements
• get_person_bo – Retrieves person related elements

where as Person Customer API is HZ_PERSON_CUST_BO_PUB

Public API for logical Organization is HZ_ORGANIZATION_BO_PUB

Public API for Organization Customer is HZ_ORG_CUST_BO_PUB

There is Business Object Events which can be used to notify the Spoke/custom systems for updates done to TCA data.

Extensibility framework and features basically comes from Oracle Product Lifecycle Management (PLM).

Extensible Attributes are similar to DFF's in the sense that Extensible Attributes feature provides out-of-the box capability to store additional information associated with certain EBS modules entities.In the past, Oracle Descriptive FlexFields (DFF) had a limitation of 15 or 22 data fields per record. There is no limit for Extensible attributes.

The functionality allows you to view and maintain these additional attributes without having to create custom screens. It also allow you to group related attributes and display attributes on specific UI pages.

R12 Extensible Attributes –What are they?

• Extensible attributes add additional rows or records into the database structure and therefore are limitless.
• Extensible attributes can contain one single record (of numerous extended. data fields) or multiple record
• The extended database fields have four data types to choose from and can contain list of value (LOV) definitions for data consistency (entry and reporting) and can control record inserts to be based upon uniqueness (no duplicates)

In Comparison to Descriptive FlexFields (DFF)

Here are the quick comparision with DFF.

Some of the features are

• Limited to certain EBS modules entities.
• Attributes can be displayed as text, check box or radio group.
• Database view is created for each attribute group.
• Uses Value Set for attribute validation.
• Extensible Attributes store unlimited number of repeating attributes (multiple rows of similar data), unlike Descriptive Flexfields.

Components of an extension:

• Attribute Group
• Attributes
• Associations
• Pages
• Functions
• Actions
• Value Sets (Recommend creating before attribute groups)

Extensible entities have corresponding tables to store additional attributes.

For example, in the case of Teleservice some of the tables are CS_INCIDENTS_EXT_B, CS_INCIDENTS_EXT_AUDIT, etc.
For TCA you have HZ_PARTY_SITES_EXT_B, HZ_LOCATIONS_EXT_B, etc.

If customer wants to use Extensible Attributes in Oracle Loans then you need to check with Loans Development to see if they implemented or not Extensibility framework.

Will see more details for TCA Extensible Attributes, in next post.

Do you know, In Release 12.1 Trade Management is now a suite of four products as below in a new product family called Oracle Channel Revenue Management that manages financially oriented channel processes.

1. Accounts Receivable Deduction Settlement
2. Advanced Rebates and Point of Sale Management
3. Price Protection [This is new product in R12.1]
4. Supplier Ship and Debit [This is new product in R12.1]

Adding these Products in Line of your Business will help you to :

• Decrease in Deductions DSO and improved visibility into all processes
• Improved Margins through process automation and accuracy with an integrated solution
• Increased productivity through automation of traditional spreadsheet managed processes
• Reduced revenue leakage

Typically these products are best suited for industry like High Tech, Life Sciences/HealthCare, Wholesale/Retail, that application are best suited if you are considering for "Invoice to Settlement" Business flow.

Lets have a brief introduction for these family products.

ACCOUNTS RECEIVABLE DEDUCTIONS SETTLEMENT

This provides a central repository of all claims and deductions to claim analysts, giving them easy access to the information they need to resolve claims quickly, and to give management full visibility into outstanding claims and deductions. It integrates resolution of deductions and claims with receivable systems and accounts payable and validates that the correct general ledger accounts are assigned. Properly approved claims automatically spawn payments and credits in Oracle Payables and Oracle Receivables.

Some of key functionality for this products are :

• Dispute/deduction handling
• Rebates Settlement
• Promotional Payments View
• Complete AR processing that means you get high visibility into aging buckets and total amounts outstanding
• Lockbox integration additional you have customer reason code mapping
• Auto-write offs
• Mass Settlements

This application is have Integration with Accounts Receivables, Accounts Payable, Order Management, General Ledger, Channel Rebate and POS Management ,Tax Engine and Oracle Collection.

Those who have high transactional volume of invoicing and disputes and currently using Oracle Financials and Order Management take take advantage of this products. This also help in order to meet your compliance regulations

ORACLE CHANNEL REBATE AND POINT-OF-SALE (POS)

Oracle Channel Rebate and Point-of-Sale Management provides functionality above and beyond that provided by Oracle Advanced Pricing for pricing scenarios including net accruals, retroactive pricing, complex volume pricing agreements, supplier ship and debit and the ability to update the correct general ledger accounts for all pricing situations including discounts. This is the only system in Oracle today that provides the correct accounting procedures for price reductions given on invoices. It also controls pricing in multi-tiered distribution.

This system addresses four critical areas related to the effective processing, POS data load, data validation & cleansing, dispute handling and Claims settlement.

ORACLE PRICE PROTECTION

Oracle Price Protection is a new module in Release 12.1 that provides distributors the ability to adjust and control their inventory valuations, purchasing costs and sales pricing based on pricing changes received from vendors. Price Protection automates the price protection processes when a vendor changes the price of a product and adjusts the GL records systematically.

More specifically, this product:

• Generates and tracks price-protection claims for both on-hand product inventory and customer product inventory
• Updates inbound prices lists and purchasing systems with new prices
• Updates costing and financial systems to reflect new prices and its execution can be done by
  • Providing consolidated view of inventory across WMS and TM (Channel inventory)
  • Calculating accruals and generate debit claims for vendors
  • Calculating accruals and issue credits for customers
  • Integrating with Oracle Costing to adjust Cost of Goods and Services (COGS)
  • Integrating with Oracle Purchasing to adjust inbound price list and purchase orders
  • Integrating with Oracle Pricing to update inbound price list with new price
  • Integrating with Oracle Financials to handle deferred revenue recognition

Price Protection leverages Oracle Fusion Middleware and has service-oriented architecture to allow for rapid deployment into heterogeneous environments. Price Protection is designed to work out-of-the-box with Oracle E-Business Suite

This product is Integrates with Procurement, Warehouse / Inventory, Costing, General Ledger, Accounts Payable, Accounts Receivable.

This new products is targeted for Wholesalers/distributors specially for High Tech customers. This application is having dependency and perquisite of first two application discussed above.

ORACLE SUPPLIER SHIP & DEBIT

Oracle Supplier Ship and Debit is a new module in Release 12.1 and a new flow introduced that enables Distributors to more quickly and intelligently respond to market conditions by automating special price requests to Vendors, in order to close more sales and increase profitability. Distributors are able to reduce the cost of managing the special pricing process as the execution and the more tedious claiming process are completely automated thereby providing greater visibility.

This products sound similar to Wholesalers/distributors specially for High Tech customers. This application is having dependency and perquisite of first two application discussed above.Supplier Ship & Debit application have Dependencies and perquisite with AR Deduction Settlement and Channel Rebate & Point of Sale Management application.

Looking for API which can delete desired party record completely.. use this API which can be used to Purge the Party Information from TCA Architecture.The name of the API is apps.hz_purge.purge_party.

Read the rest of this entry »

You can find the details in these post.Major Enhancement in R12 Receivables are:

• Partial Period Revenue Recognition: Partial Period Revenue Recognition enables the generation of revenue recognition schedules that respect the start and end dates of contractual obligations.
• Revenue Deferral Reasons: Event-Based Revenue Management allows users to define revenue deferral reasons and corresponding revenue recognition events.
• COGS and Revenue Matching: new COGS and Revenue Matching feature satisfies this matching principle by synchronizing the recognition of revenue with the recognition of associated COGS.
• Enhanced Payment-Based Revenue Recognition: Feature achieves payment based revenue recognition by associating transaction lines with revenue impacting contingencies.
• Line Level Cash Applications
• Refunds Enhancements: Oracle Receivables is fully integrated with Oracle Payables to deliver a seamless, automated process to generate check and bank account transfer refunds.
• Balance Forward Billing: enhanced version of the existing consolidated billing functionality for industries where customers are billed for all their account activity on a regular, cyclical basis. You see more details here.
• Late Charges: enhanced Late Charges functionality enabling the creation of standard late charge policies that can be assigned to customer accounts or account sites.
• Multi Org Access Control(MOAC) enabled.
• Integration with Subledger Accounting
• Receivables Reconciliation Enhancements: Easily reconcile your receivables using enhanced reporting.
• Collections Workbench Obsolescence: Features moved to Oracle Advanced Collections.
• Bills of Exchange Obsolescence: The Bills of Exchange feature is obsolete and replaced by the Bills Receivable feature.
• Trade Accounting Obsolescence: The Oracle Trade Accounting feature is obsolete and replaced by Oracle’s Deduction Management solution.

Those you are using ORACLE IRECEIVABLES or planning to use , can find major enhancement in R12 as:

• Trading Community Architecture: TCA Integrated.
• Oracle Payments: Integrated with Oracle Payments.
• Multi Org Access Control(MOAC) enabled.
• Enhanced User Self Registration: Feature has been enhanced.
• Cross Customer Site Payments: Oracle iReceivables has enhanced the payment functionality to allow the selfservice users to pay their bills and review their payments across customer sites