In recent years FASB/IASB revenue recognition regulations have changed. New standards state that an organization cannot recognize revenue until a performance obligation to the customer is satisfied.
These standards affect pretty much every type of business. All organizations must now have terms that are agreed upon by every customer as far as what constitutes the completion of a performance obligation.
These standards have been created to ensure companies are accurately reporting revenue.
Oracle JD Edwards EnterpriseOne 9.2 can help with Revenue Recognition Processing. Read below for more information.
Revenue Recognition Accounting – Industry Examples of Performance Obligations
Customer takes possession of goods and is billed at the time of the sale. Performance obligation is complete and revenue is recognized at billing.
Services are completed for a customer and they sign off on the work. The performance obligation is complete when the customer signs off on the work, and revenue is recognized at billing.
Goods are shipped to a customer and they are billed at the same time. The performance obligation is not complete until the customer takes possession of the goods and accepts them as complete. Therefore, you cannot recognize revenue at the time of billing.
The system accounts for the billing amount as a performance liability. Once the customer takes possession and accepts the goods, the revenue is recognized and the performance liability cleared. Any COGS amounts associated with the billing amount is also considered a performance liability and can only be recognized once the performance obligation is complete.
Customers are billed for portions of the contract that are complete, or for time and materials as they occur. Revenue recognition is tied to the terms of the contract for each type of billing line. Some billing lines can be recognized immediately and others may be considered a performance liability until other terms have been met.
Managing Revenue Recognition with Suspense Accounts
In E1 9.2, if you bill a customer before the performance obligation has been met, the system uses Performance Liability Accounting (PLA). The system records PLA rather than Revenue. The PLA goes into an intermediate suspense account until the performance obligation is met.
E1 9.2 has a Trigger Hierarchy function to properly track performance obligations and record revenue according to FASB/IASB standards.
Using the Trigger Hierarchy you can create flags in the system in the following modules:
- Accounts Receivable
- Sales Order
- Contract Billing
- Service Billing
Invoices processed through Revenue Recognition can be setup to recognize revenue with batch automation based on configuration rules or can be manually reviewed and edited.
This functionality in E1 allows the user to map the setup of the Trigger Hierarchy based on your business and industry, and your specific trigger factors – whether performance obligation is tied to shipping, freight terms, method of transportation, or another factor.
The system uses the hierarchy to flag invoices that need to be included in revenue recognition processing. They system then reads the configuration setup to determine the number of days until revenue can be recognized.