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.
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: -
Basic Configuration required to achieve allocation
in RMCS
- Trading community source system: Source systems are uniquely defined in the system which is required to support all other setups.
- 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.
- 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.
- 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.
- 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.
- 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.
- Pricing dimension structure: Pricing dimension structure are used to define different segments which are required in defining pricing dimension values.
- Pricing dimension assignments: This setup assigns different source document types with different pricing dimension structures.
- 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: -
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.