Table of contents
- 1. Overview
- 2. Solution
- 3. Example of Rev Rec Using Zuora Data
- 3.1. Step 1: Obtain the Invoice Information Out of Zuora
- 3.1.1. Option 1: Use Data Sources
- 3.1.2. Option 2: Export Invoices
- 3.2. Step 2: Organize the Invoice Information
- 3.3. Step 3: Recognize the Charge Amounts into Your Monthly Accounting Periods
- 3.3.1. Method 1: Daily Rev Rec
- 3.3.2. Method 2: Monthly Rev Rec
- 3.3.3. Method 3: Delaying Rev Rec
- 3.1. Step 1: Obtain the Invoice Information Out of Zuora
- 4. Handling Credits
- 5. Related
- 1. Overview
- 2. Solution
- 3. Example of Rev Rec Using Zuora Data
- 3.1. Step 1: Obtain the Invoice Information Out of Zuora
- 3.1.1. Option 1: Use Data Sources
- 3.1.2. Option 2: Export Invoices
- 3.2. Step 2: Organize the Invoice Information
- 3.3. Step 3: Recognize the Charge Amounts into Your Monthly Accounting Periods
- 3.3.1. Method 1: Daily Rev Rec
- 3.3.2. Method 2: Monthly Rev Rec
- 3.3.3. Method 3: Delaying Rev Rec
- 3.1. Step 1: Obtain the Invoice Information Out of Zuora
- 4. Handling Credits
- 5. Related
Overview
Revenue recognition is an accounting principle and process for reporting revenue. It allows companies to recognize the monetary value of a contract over a period of time as the revenue is realized and earned (when goods are delivered or services rendered). Revenue recognition is also referred to as rev rec. Businesses can differentiate and report on several types of revenue, including:
- Deferred revenue: Loosely defined as revenue from closed sales that have been billed but have not yet been recognized (for example, an invoice has been sent to a customer but the billing amount will not be recognized until the services or products have been delivered to customers).
- Realized revenue: Defined as revenue representing services or products which have been delivered to customers.
The triggers and formulas that describe how revenue is recognized can vary greatly between business and product lines. In most cases, there is a defined best practice for revenue recognition around particular types of products and services.
SasS (Software as a Service) companies typically recognize on billings over a period of time rather than all at once. The Zuora product currently provides revenue recognition codes and triggers only, and requires help from an external revenue recognition engine to calculate the deferred/realized/recognized revenue for a particular accounting period. This topic describes how to recognize revenue with the data that Zuora provides.
Importance of Recognizing Revenue
Recognizing revenue properly and consistently is important to be able to accurately measure a company's financial performance. The business must line up "revenue" coming in with the expenses that were incurred to bring in that revenue. This alignment between revenue and expense is the basis of accurate financial reporting, and provides the foundation for operation management that requires an accurate measurement of the true financial state of businesses. For a subscription economy business, services to the customer, and thus expenses, are typically incurred throughout the customer life cycle. Because of this, if you are pre-billing your customers and receiving money upfront, you need to spread that money into revenue recognized throughout the entire term of agreement with the customer.
Solution
You must meet the following criteria before you can recognize revenue:
- Persuasive evidence of an arrangement exists
- Delivery has occurred
- The vendor's fee is fixed or determinable
- Collectibility is probable
Persuasive Evidence of an Arrangement Exists
A business must have a contract or an agreement with its customer to establish clear and persuasive evidence that the customer intends and agrees to buy from the business.
In Zuora, a subscription or a subsequent amendment order usually establishes such an arrangement between the business and its customers. In addition, when you create a product rate plan charge, you can decide to set up a revenue recognition trigger condition that is one of the following: Contract Effective date, Service Activation date, or the Customer Acceptance date of the subscription. Given your business requirements, you can pick one of these three dates to indicate that persuasive evidence of an arrangement exists.
Delivery has Occurred
Your business needs to deliver the agreed-upon service or product before it can recognize the revenue that is associated with that delivery. For example: In a subscription business, you can have an annual contract for 365 dollars, and bill the entire 365 dollars up front. Because you have not yet delivered the service, you cannot recognize any revenue when you send out the invoice for $365. However, because you deliver service each day, you can recognize $1 daily.
Zuora provides a variety of options to accurately calculate how much service delivery has occurred. Every subscription has Subscription Start/End dates and Subscription Term Start/End dates. Every rate plan charge has effective Start and End dates. Every invoice item has Service Start and End dates that show the period over which the invoice item is being billed. With these dates, you can decide when service delivery has occurred and in turn find out how much revenue you can recognize.
The Vendor's Fee is Fixed or Determinable
Your business must establish a fixed or determinable price for the service it provides to your customers. Providing usage-based pricing, extended payment terms, or rights of return/refund might indicate that the price is not fixed or determinable. Because of that, the price could be subject to additional revenue recognition rules. In general, if it cannot be concluded that a fee is fixed or determinable at the outset of an arrangement, revenue should be recognized as payments from customers become due.
Zuora helps you determine the price for the services that you provide, either at contract time for fixed price subscriptions, or at invoicing time for usage and variable pricing subscriptions.
Collectibility is Probable
Your business cannot recognize revenue until you have received the payment, or you are reasonably assured to collect the payment. This condition varies by company and by industry.
For example, a software company that sells to enterprises will generally perform a great deal of due diligence before selling their product to a customer. A typical company will sign a legal binding contract with the customer, make sure the customer has a strategic need for the product, and will make sure the customer has the necessary financial backings to follow through on the purchase. In this case, the business can have the policy that, based on past customer dealings, once they book the order, they can expect to receive the payment. Thus, collectibility is probable at booking time.
If you are an Internet consumer service that offers self-signup, you might decide that you want to make sure that you issue the monthly invoices before you can be reasonably assured that your customer is going to pay. In that case, collectibility is probable at invoicing time. Now, let's say you are an online gaming company and your main customers are teenagers, or you are a mature business selling into a new geographic region that you have not operated in before. In either of these cases, there are considerable and unknown risks in collecting payments. You might decide to be more conservative in your policy and only recognize revenue when you have received the payment. In that case, collectibility is assured at cash receipt time.
Whether your business requires probable collectibility at booking time, at invoicing time, or at cash receipt time, Zuora can help you recognize revenue by giving you access to data from critical business objects such as subscription, invoice, and payment.
Example of Rev Rec Using Zuora Data
In this example, you are an Internet consumer service selling online storage. One of the products you offer is for 100GB of storage accessible anywhere. You have two rate plans: A monthly plan of $20 per month, and a yearly plan of $180 per year. You always bill in advance, you report in monthly accounting periods, and you decide that you can satisfy three of the four revenue recognition requirements at invoicing time (you cannot satisfy the "delivery has occurred" requirement).
How do you recognize revenue using data available in Zuora?
Step 1: Obtain the Invoice Information Out of Zuora
First, you need to get the invoice information out of Zuora. There are two ways to do that.
Option 1: Use Data Sources
The first option is to use the data source functionality and retrieve all the invoice line items from posted invoices. You can also choose to include related information from other data objects, such as Account or Product Rate Plan.
Option 2: Export Invoices
Use the invoice export functionality by navigating to Billing Operations > Invoices, then clicking Export Invoices in the Action area (on the right).
Step 2: Organize the Invoice Information
After using one of the two options described above, enter your invoice information into a spreadsheet. For example:
Step 3: Recognize the Charge Amounts into Your Monthly Accounting Periods
Method 1: Daily Rev Rec
Daily rev rec is a common way of recognizing your charge amounts into your monthly accounting periods. To do this, divide the charge amount by the number of days in the service period to figure out how much revenue you can recognize each day. Then add up the number of days in each accounting period (each month) to figure out how much to recognize.
Method 2: Monthly Rev Rec
Another common method is to do monthly rev rec. This means you will recognize the same amount of revenue for all full months, whether it is February with 28 days or March with 31 days.
Method 3: Delaying Rev Rec
Similarly, if you want to delay revenue recognition with a revenue trigger date of Contract Effective, Service Activation, or Customer Acceptance, you can export that information into the spreadsheet and remove all revenue recognized before the trigger date. You can then recognize these revenues entirely at the trigger date, or spread across the remaining period.
The following shows an example with daily rev rec where all revenues prior to the trigger date are recognized entirely at the trigger date:
Handling Credits
If you need to issue credit to your customers, and therefore need to remove a portion of the revenue, you can follow a similar procedure as the one described above.
Step 1: Export Invoice Item Adjustments
You can export your invoice item adjustments by navigating to Billing Operations > Invoice Item Adjustments, then clicking Export Invoice Item Adjustments in the Action section (on the right).
Step 2: Remove Revenue
You can then use a similar mechanism to recognize (remove) revenue for the invoice item adjustment. The following example has two invoice item adjustments at the bottom that adjust out the top two invoice items, again using daily rev rec.
Comments