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Leveraging Oracle Revenue Management Cloud System to Meet IFRS 15 Contract Cost Amortization Requirements

Oracle Revenue Management Cloud Service (RMCS) - Introduction

Oracle Revenue Management Cloud Service (RMCS) is an automated and centralized revenue management product that empowers organizations to comply with the ASC 606 and the Accounting Standard IFRS 15 requirements of revenue from contracts with customers. RMCS helps organizations in automating the identification and creation of customer contracts and performance obligations, their valuations, and the accounting entries through a configurable framework.

RMCS is tailor made to meet the IFRS15 / ASC606 requirements including the transition requirements. Apart from this, RMCS also provides robust integration with third party applications including Oracle EBS (and other non-oracle systems) to fulfill the requirements of IFRS-15.

Standard RMCS features enable organizations to recognize revenue from contracts with customers as per IFRS-15. However, the product does not offer features to amortize the contract costs as per IFRS-15. At Infosys we have extended the usability of RMCS to recognize and amortize Contract Costs as per IFRS-15.

This document provides a solution overview on recognizing and amortizing Contract Costs in RMCS and the initial accounting setups which are required. The content included in this document is industry or organization agnostic.

 

Recognizing Revenue from Contracts with Customers in RMCS

The most striking change in recognition of Revenue has been the introduction of the new five- Step Model for recognition of revenue.

View image

 

The new standard impacts all the organizations requiring to report according to IFRS and US GAAP. Since, the change deals with revenue, and is expected to have organization wide impact.

Sample case showing how Revenue is recognized as per IFRS-15 in RMCS: -

Domain: Telecom

Contract Period: 6 months

Contract Start Date: 15.01.2018

Contract End Date: 15.07.2018

Plan: Telecom plan which include monthly fixed fee- $ 100 along with a handset at the start of the plan

Say, X Ltd sells separately Handset at $ 300 for 6 months and the monthly fee without handset at $ 80.

1.       As per IFRS-15, X Ltd needs to identify the contract (Step 1) which is a 6-month contract with the customer.

 

2.       Then, X Ltd needs to identify all the performance obligations (Step 2) from the contract with the customer which is:-

·         provide a handset

·         provide network services over 6 months

 

3.       Decide the transaction price (Step 3) which is $ 600

 

4.       Apportioning the transaction price (Step 4) of RS 600 to each performance obligation based on their relative stand-alone selling price: -

Performance Obligation

Standalone Selling Price

Allocated %

Allocated Revenue

Revenue Recognized

Handset

300

38.46%

230.76(600*38.46%)

230.76

Network Services

480(80*6)

61.54%

369.24(600*61.54%)

61.54(369.24/6)

Total

780

100%

600

292.30

 

5.       Recognizing the revenue (Step 5) when X Ltd satisfies the performance obligations:

·         Recognizing the Revenue from Handset, when X Ltd gives Handset to customer -$ 230.76

·         Recognizing the Revenue from Network Services provided for $ 61.54 monthly during the period of the contract which is 6 months.

Expected Accounting entries generated in RMCS are as summarized below: -

Period

Description

Amount

Debit

Credit

Event

T0

Recognition of Contract Asset and Liability in relation to the Services and Handset

Contract Asset

600

 

Initial Performance

Contract Liability

 

600

T1

Monthly Billing of Revenue 

Contract Clearing

292.30

 

Performance Obligation Billed

Contract Asset

 

292.30

T1

Recognizing of monthly Revenue and its allocation

Contract Liability

292.30

 

Performance Obligation Satisfied

Revenue from Handset

 

230.76

Revenue from Network Service

 

61.54

T2-T6

Monthly Billing of Revenue 

Contract Clearing

61.54

 

Performance Obligation Billed

Contract Asset

 

61.54

T2-T6

Recognizing of monthly Revenue and its allocation

Contract Liability

61.54

 

Performance Obligation Satisfied

Revenue from Network Service

 

61.54


Accounting for cost as per IFRS-15

IFRS 15(Revenue from Contract with Customers) is primarily a standard on revenue recognition, it also has requirements relating to contract costs. As a result, organizations may require change their accounting for these costs on adoption of IFRS 15.

Prior to IFRS 15, there was no specific accounting standard addressing the accounting for costs, entities referred to a number of different standards and principles in accounting for various types of costs incurred. Existing standards IAS 18 Revenue and IAS 11 Construction Contracts contained only limited guidance, mainly on applying the percentage of completion method (under which contract revenue and costs were recognized with reference to the stage of completion).

IFRS 15 introduces a new guidance on accounting for the costs related to contract: -

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Basic Configuration required to achieve allocation in RMCS

 

  1.                    Trading community source system: Source systems are uniquely defined in the system which is required to support all other setups.
  2.                  Source document codes: Source document code is base setup to define source document types.
  3.                 Source document types: Source document types are defined to indicate different lines of business. For example: if a business has manufacture line and service line then two type of source document types need to be defined.
  4.                 Revenue system options: Different types of accounts i.e. contract asset account, contract liability account, contract discount account, price variance account and contract clearing account are defined through revenue system options.
  5.                   Standalone selling price effective periods: Depends on pricing policy of the business and how frequently these changes helps to determine effective periods to define standalone selling price of different products.
  6.               Contract identification rules: Contracts are created in system based on the contract identification rules. Different contract identification rules are created for different source document types.
  7.             Performance obligation identification rules: These rules are created to define how different performance obligation lines will be treated for a particular contract. Different performance obligation rules are created for different source document types.
  8.           Pricing dimension structure: Pricing dimension structure are used to define different segments which are required in defining pricing dimension values.
  9.               Pricing dimension assignments: This setup assigns different source document types with different pricing dimension structures.
  10.                   Standalone selling price profile: This setup is done to define items in different standalone selling profile and to define standalone selling price. Profiles are created based on different pricing dimension assignments.

Extending the Usability of RMCS to Costing Scenario

In order to recognize Contract Cost as per IFRS-15 (If the contract period is for more than 12 months), organizations need to amortize contract cost over the period of the contract. In this scenario, Contract Cost should be debited and Contract Asset should be credited. But initially in RMCS, while recognizing revenue Contract Liability Account is debited and Contract Revenue Account is credited. Therefore, in order to achieve the accounting for Contract Cost we need to apply Sub Ledger Accounting in RMCS.

Sub ledger Accounting supports multiple accounting representations concurrently in a single instance. We can create a particular set of rules for specific transactions and create accounting for the transaction with the accounting methods defined.

 

Configurations Required for Sub Ledger Accounting to Meet Cost Amortization

This is how best we can understand the relationship of the components used for Sub Ledger Accounting: -

View image

After completing basic RMCS configuration, below are the high level SLA setups required to achieve Costing Scenarios:

        I.            Accounting Method: We need to create a new Accounting Method so for accounting treatment for each accounting event class, accounting event type for the Costing Scenario.

      II.            Account Rules: Account Rules enable us to define the logic of determining the segment value to be used for each transaction. We create different rule types to fetch Account combination, Segment, and Value Set.

In order to create accounting entries for costing scenario, we need to create three different Account rules, namely: -

a.       Contract Liability Custom Account Rule

b.      Contract Asset Custom Account Rule

c.       Contract Revenue Custom Account Rule

Each of the above rules should have a condition to identify and alter the account for cost contracts.

 

    III.            Sub ledger Journal Entry (JE) Rule Set: Sub Ledger Journal Entry Rule Sets enables us to generate complete JE for an accounting event. This summary of the set of rules needs to be validated before it can be linked to the Accounting Methods for the sub ledger. The Sub Ledger Journal Entry Rule Set can be assigned only to a Sub Ledger Accounting Method with the same chart of accounts. Before creating Sub Ledger Journal Entry Rule set, ensure that the below subcomponents, if required, of Sub Ledger Journal Entry Rule Set are correctly defined: -

a.       Description Rules

b.      Journal Line Rules

c.       Account Rules

 

    IV.            Accounting Methods assignment: After creating Sub Ledger Journal Entry Rule Set, assign the Rule set with the already created Accounting Method. The Status of the Accounting method defined is incomplete initially.

      V.            Activate Sub Ledger Journal Entry Set Assignments: In order to activate the accounting setups, submit the Activate Sub Ledger Journal Entry Rule Set Assignments process. The Status of the Accounting Method should be 'Active'.

Expected Accounting Entries in RMCS for Costing Scenario: -

Say, Contract Cost to be amortized -$ 2400 for 24 months

Period

Description

Amount

Debit

Credit

T0

Initial Performance

Contract Asset

2400

 

Contract Liability

 

2400

T1-T24

Amortization of Cost

Contract Cost

100

 

Contract Asset

 

100

Conclusions-RMCS with Custom Sub Ledger Accounting - A Game Changer!!!

With Oracle RMCS and Infosys tried and tested SLA extensions, now organizations can not only recognize Revenue according to IFRS 15 but also recognize and amortize contract costs as per IFRS 15. This enables organization to have a single Oracle supported solution for meeting all their IFRS15 requiremnts.

Please reach out to Infosys/authors for your organization specific requirements and to leverage the power of RMCS to ease your transition to IFRS 15 standard.


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