Revenue Management

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Topic

    Anand Naik
    What constiutes Initial Performance Event
    Topic posted July 20, 2019 by Anand NaikGreen Ribbon: 100+ Points, tagged Revenue Management 
    95 Views, 7 Comments
    Title:
    What constiutes Initial Performance Event
    Content:

    Oracle product documentation states that contract liability is recognized  as follows - Revenue Management uses the earlier of the billing event or initial performance event to accrue performance obligation liabilities.

    The question is what qualifies as IPE. For example lets say Sales order was booked on 1st Jan, shipped on 15th Jan and Invoiced on 31st Jan. In this sceanario, what will be the IPE date for booking contract liability - Order booking date of 1st Jan or the shipment date of 15th Jan.

     

    Thanks in advance

     

    Regards

    Anand 

     

    Version:
    Oracle Revenue Managment Cloud - 18C

    Comment

     

    • Praveen T

      Hi Anand,

      As far as my understanding, IPE event should be created when the order is booked. When the order is shipped, it is referred as 'satisfaction of performance obligation'.

      Note: In fusion cloud, there is no integration from OM to Revenue Management. You need to use FBDI templates to create contracts.

      In case of EBS to Revenue management, OM order can be interfaced to revenue management.

      Hope, this clarifies you.

       

      Regards

      Praveen

       

      • Helle Hennings

        Praveen and Anand,

         

        Be careful. The standard setters do not want uncommitted orders on the balance sheet. 

        Open orders are a way to increase to inflate the worth of a company, and could be used in IPO fraud and credit fraud.  Sure, the obligation-liability is offset by the right-to-bill, but the chances of over-reporting one or another are huge, and the accounting standard setters decided quite deliberately to make the point of recognition (when you recognize an asset, liability, revenue, or expense)  not be “at inception”, but be at the point “when either party performed”.  Accounting standards are about 2 things: recognition & valuation. 

        Regards,

        Helle

        • Praveen T

          Hi Helle,

          I totally agree with you. It is completely business decision involving finance and audit team on creation of IPE event.  As a normal practice, once the order is booked and  agreed, company is contractually oblidged to fulfill the order. Can we assume that once the order is booked, an orgnaization has started the work on making the item/services to be made available to the customer. Coz, certaain items are ready to stock and certain items are OTM. Hence, not sure you can decide this item by item or at order level.

          Request your thoughs on this.

          Regards

          Praveen

           

           

           

          Regards

          Praveen

          • Helle Hennings

            Praveen

             

            You would not create an accrual for performance obligation liability and contract asset at the time sales order is created.

            It is really an analysis you make with the client and the client's accounting advisor on when an initial performance event can be deemed as having occurred. You need to identify the data you need to drive the IPE event upstream, and pull it in.  And as that idea is new in ASC 606, folks have likely not set up their sales cycle products to capture it.  You, the system integrator, has to work with the client find that 'triggering' data somewhere in the upstream systems and capture it. 

            Regards,

             

            Helle

      • Helle Hennings

        Hi Anand

        Just to clarify:

        You could have an order for 10 machines and an agreement with the client that until all 10 machines are received, the client will not be satisfied and hence if you ship the first machine, the seller has acted (initial performance event - either party acts) e.g. an accrual to contract liability and contract asset is generated for the 10 machines, however, no revenue is recognized as yet. Even when subsequently another machine is shipped, no revenue is recognized, only once the final machine is shipped and client is satisfied will you recognize the revenue for the 10 machines that were shipped.

        This outcome can be controlled by the Performance Obligation Identification Rule setup by setting the Satisfaction Method to "Require Complete" - meaning not until all 10 machines have been shipped can revenue be recognized. However, if you set Satisfaction Method to 'Allow Partial' then you can start recognizing revenue when each machine ships and when that first machine ships an accrual to contract liability and contract asset is generated for the total allocated amount of 10 machines.

        Regards,

        Helle

    • Helle Hennings

      Hi Anand,

      The client and their accounting advisor should work through the client's business processes to identify when it is perceived that either party performs.

      Either Party Performs is the first phrase in the Presentation section of the ASC 606 / IFRS 15 accounting standard, and it marks the point of recognition as an obligation (liability). So “either party performing” is the definition of committing to an order.  The selling entity performs by doing something (processing the license code, promising the pod, digging a hole for foundations, putting a PC in a box and shipping it, laying the keel, sending out a consultant, etc. etc.) or the customer performs by accepting their liability to pay for it (different to paying a deposit).

      The standard setters do not want uncommitted orders on the balance sheet.

      Likelihood is in the example you've given that the IPE date is at time of shipment on 15th Jan, however, that really is something the client and their accounting advisor need to determine when analyzing ASC 606 / IFRS 15 and comparing against the client's business practice/processes.

      Regards,

      Helle

    • Anand Naik

      Thank you Helle and Pravin