Milestones, Carve-Outs, Milestones, Carve-Outs, DeferralsDeferrals

Overcoming Revenue Overcoming Revenue Recognition ChallengesRecognition Challenges

Options, Considerations and Lessons LearntOptions, 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: 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

1. Challenges and Objectives in Revenue 1. Challenges and Objectives in Revenue

Recognition automation Recognition automation

2. Flexible Milestones Rule Automation 2. Flexible Milestones Rule Automation

3. Revenue ‘Carve-Out’ Requirements and 3. Revenue ‘Carve-Out’ Requirements and

Solution Detail Solution Detail

4. Lesson Learnt4. Lesson Learnt

Topics

Current Business ModelCurrent 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 sufficientMilestone 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 re-allocation 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 Line Num

Order Line Num

Inv Qty

Unit Selling Price

Item Num

Parent Child

Parent Child Grp

Appl Method

Accounting Rule

Proj Rev - Calc Amt

Functional Amt

Recognized Amt

Def Rev Acct

Deferred Amt

10102518 1 1.1 158,000

.00R5210A

P 1 N/A 51,260.00 58,000.0051,260.0

00.00

10102518 5 8.1 1 0.00730-0001

C 1PERCENT

0.00 0.00 0.00 0.00

10102518 2 2.1 110,000

.00NRE C 1

VALUE

10,000.00 10,000.0010,000.0

00.00

10102518 3 3.1 1 0.00R5210A

C 1VALUE

0.00 0.00 0.00 0.00

10102518 4 4.1 1 0.00730-0001

C 1PERCENT

0.00 0.00 0.00 0.00

Deferred Revenue Control Report - Reconciliation

Forecast – Deferred Revenue – Order Entry Control

Lesson Learnt 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 ! Thank you !

Hans Kolbe, Celantra Systems hanskolbe@celantrasystem.com

+ 1 (415) 730 - 1131