D365FO - Revenue recognition

Microsoft describe “Revenue recognition functionality” who were part of update 10.0.5 - October 2019 in the following way:

“Revenue recognition allows you to define revenue prices and revenue schedules for multi-element sales of hardware, software, support, and subscriptions to fulfill US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) requirements.

·        Revenue prices - Revenue prices can be defined on released products and then used to determine the price at which to recognize revenue. The revenue price can differ from the sale price that is offered to the customer.

·        Revenue schedules- Revenue schedules determine the number of months for the revenue deferral. Options are available to create the schedule based on actual days of the month, splitting equally across the month, or based on a set number of occurrences.

·        Multiple sales order reallocation - Reallocation allows the revenue price to be recalculated after a new sales order line is added to an invoiced sales order or to a new sales order. The new line will be reallocated if the additional item should behave been included in the original contractual agreement.

·        Workspace - The new workspace is used to review the status of the revenues schedule records created for deferred revenue.”

IFRS 15 Revenue from Contracts with Customers became effective for annual reporting periods beginning on or after 1 January 2017. IFRS 15 is based on the transfer of control of the goods or services that are transferred to the customer. It is thus crucial for the recognition of revenue that the buyer has gained control of the transferred goods or services.

Revenue recognition configuration

License key

You enable the functionality under License configuration > General ledger > Revenue recognition module

When enabled the new module is added.

Revenue recognition manager security role

A new security role grant access to the Revenue recognition module and Revenue management workspace.  It does not grant access to all menu items in the Revenue recognition module.

Revenue schedules

Revenue schedules control the behavior of revenue recognition:

·        Occurrences: Number of months for revenue deferral and recognition.

·        Automatic hold: If a schedule must be set on hold and require manual release before recognition when you are not sure about when you can release the revenue e.g., if you deliver an installation service but do not know when you deliver the service you can set it on hold and recognize the revenue when the occurrence happens

·        Automatic contract terms: If start and end date is set automatic when sales order lines are created based on the requested ship date on the sales order line

·        Recognition basis and convention: How and when revenue is recognized

Revenue schedule details are automatic created based on the schedule. You can manually adjust the schedule details.

Inventory posting

The functionality can only be used for released items and not for categories or free text invoices. Posting is configured under Inventory > Sales order using the three new transaction types.

Revenue journal

A new journal type is used for revenue recognition. It is created in the same way as other general journals. It is used to post recognized revenue from the balance to P&L.

General ledger parameters – Number sequence

A new number sequence is used if sales orders are reallocated.

General ledger parameters – Revenue recognition

On the Revenue recognition tab, you select:

·        Revenue recognition journal used: select the revenue journal used

·        Enable discount allocation method: if you setup a separate “fair market value” price for revenue recognition different from your selling price you enable this functionality

·        Post invoice corrections to Accounts receivable when reallocating: when enabled it will reverse the customer transaction and create a new one if you reallocate an invoice already posted. The original transaction will be settled against the reverse transaction.

Released products

A new tab “Revenue recognition” is available on the released products.

·        Revenue schedule: select the relevant revenue schedule created previously

·        Is revenue allocation active: If set to “Yes” the item will be included in the revenue allocation calculation for the “related” performance obligations in the contract.

·        Revenue type – “performance obligations”. There are three different type:

o  Essential: companies primary revenue source e.g., hardware, machine, collaborative robot. Default setting when selecting a revenue schedule

o  Nonessential: companies secondary revenue source e.g., warranty, service, insurance

o  Post contract support: e.g., installation of hardware, machine, collaborative robot. Can be delivered in another period than the essential item. When allocated it will be distributed across other items on the sales order with revenue type essential and nonessential.

According to IFRS 15 no allocation is allowed when an item can be sold and function alone e.g., selling a car with a service contract since the car can be used without a service contract.

Item revenue prices

If the item have another “Fair market price” that the sales price you set up the “Fair market price” on the released item on the “Sell” pane by selecting menu item “Revenue prices”.

Unfortunately, you have to setup a price for each currency you use on sales orders for that released item. Microsoft is aware of that and expect to improve the functionality so only one Revenue allocation price must be set up for each released item.

Item group – Revenue recognition

If items within an item group use a specific revenue recognition schedule, you can set revenue recognition up on the item group.

Existing released items will not be updated when you configure or adjust configuration for Revenue recognition on an item. It will only be inherited when creating new released items.

Defer revenue and recognize deferred revenue

A contract has been signed with a customer containing three items not sold separately.

Released items used

Three items are included in the contract with the customer:

X1 Collaborative robot ABC:

·        Sales price USD 10.000 = Revenue price

·        No Revenue schedule selected

·        Price allocation enabled

·        Revenue type: Essential

X2 1 year service Collaborative Robot:

·        Sales price USD 1.000 = Revenue price

·        Revenue schedule 12 month selected

·        Price allocation enabled

·        Revenue type: Nonessential

X2 Installation Collaborative Robot ABC:

·        Sales price USD 500 = Revenue price

·        Revenue schedule “1 Occurrence” selected

·        Price allocation enabled

·        Revenue type: Post contract support

Create sales order

A sales order for the contract is created with the three items.

When you confirm the sales order the menu items “Revenue price allocation” and “Expected revenue recognition schedule” becomes active and you can review the calculation before you invoice the sales order. If you do not need to review before invoicing the sales order the calculation will be done anyway.  

The installation service is allocated proportional on the Essential and Nonessential items.

In the example the allocation is divided proportional over the 12-month used on the allocation schedule for the Nonessential item.

The invoiced sales order posts the following transactions:

Notice that the installation amount of USD 500 is partly recognized together with the Essential item (USD 10.454,55) and partly deferred together with the Nonessential item (USD 1.045,45).

Recognize revenue

When you select Revenue recognition > Periodic tasks > Revenue recognition schedule you can filter calculated revenue recognition schedules and select the once relevant for revenue recognition for the month you are about to close.

You can edit the information e.g., the recognize date must be changed, only a partial amount must be recognized, or a deferred revenue must be put “On hold”.

If a deferred revenue has been put “On hold” you can release it using the menu item “Remove hold”.

If the revenue schedule is incorrect, you can update it by selecting menu item “Update contract terms”. If you already started releasing deferred revenue the recognized revenue will be reversed and replaced by the new once.

Select menu item “Create journal” to export the relevant for this month.

·        Selected date: select a date when you want the deferred revenue recognized (typical end of month being closed)

·        Revenue schedule date: recognize revenue at the release date for each transaction => different postings dates will be used in the journal

I select “Selected date” and a journal is created. In the example only one sales order is used but if revenue have been reversed for several sales order all deferred revenue that fulfill the criteria in the Create journal parameters would be included in the journal.

When the journal is created the line(s) included in the journal is marked as “Processed” and when the journal is posted the journal voucher number is displayed in the Revenue recognition schedule form:

Conclusion

I think the functionality offer a much better tool for companies to manage and document deferred and recognized revenue when creating annual reports in accordance with IFRS 15.

If you want additional information about the solution, I suggest you watch the Microsoft video where Kristi Slininger present the solution: Microsoft Dynamics 365 for Finance and Operations:... - Power Platform Community