Certain revenue contingencies place the likelihood of collectibility in doubt. For such transactions, you should not recognize revenue until you receive payment. Oracle Receivables automates this process with Payment-Based Revenue Management.
See: Contingencies for Payment-Based Revenue Management.
If certain revenue contingencies are found on an invoice, then:
The Revenue Management Engine initially defers revenue on the sum of all line balances, excluding taxes, freight, and late charges.
Note: If collectibility of a particular invoice line is doubtful, then Receivables defers revenue only for the line, not the entire invoice. See: Doubtful Collectibility.
When you apply a cash receipt to an invoice that is under collectibility analysis, Receivables analyzes the invoice to determine if deferred revenue exists.
Under certain circumstances, full or partial receipt application on an imported invoice can trigger automatic recognition of previously deferred revenue. In such cases, Receivables initiates the distribution of revenue in the amount of the applied receipt from an unearned revenue account to the appropriate earned revenue account.
If Receivables bases revenue recognition on receipt application, then the total amount of revenue that is recognized can never exceed the original amount due on the invoice line, less any applicable credit memos.
If you later need to reverse a receipt after application, then Receivables automatically moves the amount of the reversed receipt back to an unearned revenue account. See: Modifying Invoices Under Collectibility Analysis.
Note: If you are applying a receipt to an invoice with rules, but you haven't yet run Revenue Recognition, then Receivables automatically runs Revenue Recognition for that invoice only.
See: Evaluating Invoices for Event-Based Revenue Management.
Payment-based revenue management occurs when deferred revenue exists on the invoice due to these revenue contingencies:
Creditworthiness
You can select up to three credit classifications that indicate noncreditworthiness in the Revenue Policy page. See: Defining Your Revenue Policy.
Receivables uses information from Credit Management to determine a customer's creditworthiness.
If the Revenue Management Engine cannot associate the customer on the invoice with one of these three credit classifications, then the customer is presumed to be creditworthy.
However, if a customer can be associated with one of these three credit classifications, then Receivables assigns the Creditworthiness contingency to all invoice lines and the Revenue Management Engine defers the entire invoice amount.
Extended Payment Term
You can define the payment term threshold in the Revenue Policy page. See: Defining Your Revenue Policy.
If an invoice payment term exceeds the stated threshold, then Receivables assigns the Extended Payment Term contingency to all invoice lines and the Revenue Management Engine defers the entire invoice amount.
Collectibility of the following line items is typically in doubt, and should not be considered earned revenue until payment is received:
Late charges
Impaired loans
Lease payments for evergreen lease agreements
Miscellaneous leasing fees
Other fees
Decisions about doubtful collectibility are typically made in feeder systems, before AutoInvoice import occurs.
Attention: If an invoice line is entered or imported with this contingency, then the Revenue Management Engine defers revenue only on the imported line, not the entire invoice amount.
Deferred revenue can exist on an invoice due to a combination of the contingencies listed above, as well as time-based contingencies. In such a case, applied payments initiate revenue recognition only if time-based contingencies have expired.
See: Event-Based Revenue Management When Multiple Contingencies Exist.
Receipt application has no impact on revenue recognition if:
The receipt is a miscellaneous receipt. Only standard (cash) receipts have potential revenue recognition implications.
You are applying a receipt against an invoice whose revenue was manually deferred by the Revenue Accounting feature using the RAM wizard.
You are applying a receipt against an invoice whose revenue was deferred by the Revenue Management Engine due to unexpired time-based contingencies.
In this case, Receivables keeps the revenue amount for that invoice line in the unearned revenue account, but flags it as revenue that is pending recognition until after the contingency expires.
When applying a partial receipt, Receivables uses a weighted average formula to calculate the revenue amounts to recognize for each line.
For example, you import a $350 invoice with three lines.
When you imported this invoice, the Revenue Management Engine deferred all revenue on this invoice because the customer was not creditworthy.
Later, you apply a receipt for $100 against this invoice. Because customer is not creditworthy, Receivables can recognize revenue only to the extent of the applied receipt. Because this is a partial receipt, Receivables must calculate how much revenue to attribute to each invoice line.
Receivables calculates the revenue for each line as follows:
Line 1 = $50
($50/$350) * $100 = $14.28571
Receivables rounds this amount down to $14.28.
Line 2 = $100
((($100+$50)/$350) * $100) - $14.28 = $28.5771
Receivables rounds this amount down to $28.57.
Line 3 = $200
((($200+$100+$50)/$350) * $100) - ($14.28 + $28.57) = $57.15
Receivables rounds the last amount up to account for the rounding of the previous lines.
For additional receipts against this invoice, Receivables calculates the revenue for each line using this same method.
Suggestion: You can also apply receipts at the line level. See: Applying Receipts in Detail.
Revenue that is recognized based on receipt application can never exceed the original amount due on the invoice line, less any applicable credit memos. Therefore, in the event of an overpayment, Receivables will not recognize the overpayment as revenue, even if you selected the Allow Overapplication check box on the invoice's transaction type.
These examples illustrate the impact of receipt applications on the event-based revenue management process.
You apply a payment for $200 against invoice 1001.
After reviewing the original invoice 1001, Receivables determines that this transaction was never eligible for automatic revenue recognition. This could be due to several reasons:
The invoice was not imported via AutoInvoice or created by the Invoice API.
A deferred accounting rule is assigned to the invoice.
Event-based revenue management was never activated for the invoice.
Either no revenue policy was entered in the System Options window, or contingencies did not exist on the invoice during import.
In this case, Receivables does not proceed with further analysis of this receipt. Applying a payment to invoice 1001 will not trigger revenue recognition.
You apply a payment for $600 against invoice 2002. The amount due on this invoice is $600.
Receivables reviews the original invoice 2002, and determines that the Revenue Management Engine deferred revenue on this invoice because the customer was not creditworthy.
Since the payment has now been received and applied against the invoice, Receivables recognizes the revenue by debiting $600 from the unearned revenue account and crediting $600 to an earned revenue account, according to the initially assigned accounting rules.
You apply a payment for $400 against invoice 3003. This invoice has 5 lines: Line 1 is $200, Line 2 is $450, Line 3 is $100, Line 4 is $700, and Line 5 is $550.
Receivables reviews the original invoice 3003, and determines that the Revenue Management Engine deferred revenue on this invoice because the invoice was assigned an extended payment term, Line 3 is associated with a non-standard refund policy, and Line 5 is associated with a cancellation provision.
The $400 receipt is a partial payment. Receivables prorates this payment across the invoice lines, based on a weighted average formula. However, for simplicity, assume that Receivables applies $80 to each invoice line.
Receivables recognizes revenue for Lines 1, 2 , and 4 in the amount of $80 each.
Receivables cannot recognize revenue for Lines 3 and 5 due to the unexpired time-based contingencies. However, Receivables flags the $80 payments for Lines 3 and 5 as amounts that are pending revenue recognition at a later date.
When the contingencies later expire, Receivables recognizes revenue for Lines 3 and 5 in the amount of $80 each. See: Monitoring Contingencies with the Revenue Contingency Analyzer.
Future receipts that you apply against this invoice will be analyzed in this same manner.