Contract Impairment

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Contract Impairment

Contract gets into impairment state when the lines of the revenue contract get cancelled after part of it or full line revenue is already recognized. RevPro handles impairment for the allocation amount which gets recognized whereas corresponding contractual amount which scheduled for the future and get canceled before it gets recognized.

In RevPro, the following types of Contract Impairment are handled:

  • Account Type - Where Impairment amount goes to impairment account type.
  • New POB - Where Impairment amount creates a new line with a new POB.
  • Impairment Type Null - Impairment amount is left out in the Revenue Contract.

The impairment type is decided based on impairment type flag that gets populated while collecting the canceled line.

Contract Impairment Amount Goes to Impairment Account Type

The revenue contract has three support lines, each for a period of one month starting from 01/01/ 2017 to 03/31/2017. The lines are grouped into the same revenue contract based on the grouping logic. In this example, it is Sales Order number.

Table 1: Lines Collected into RevPro

Sales Order number

SO Line No.

Line item

Ext List Price

Ext Sell Price

SSP %

 

Start Date

End Date

Ext. SSP

Price

(A)

Carves

 

(B)

1001

101

Support

3600

1200

72

01/01/2017

01/31/2017

2592

1200

1001

102

Support

3600

2400

72

02/01/2017

02/28/2017

2592

0

1001

103

Support

3600

3600

72

03/01/2017

03/31/2017

2592

-1200

The above lines are collected into RevPro system based on the grouping rule. Sales Order number 1001 with Revenue Contract 1 gets created. The Initial entry for carves gets created either at the time of schedule creation or at the time of billing the document collected into the RevPro system. In this example, first line carve-in 1200 and third line carve-out 1200 are based on the calculation below:

* RSP = Extended SSP Price/ Sum of Extended SSP Price

Table 2: Extended SSP Price Calculation

Sales Order number

SO. Line No.

Line item

Ext List Price

(A)

SSP Percentage

 

(B)

Ext. SSP

Price

(A*B/100)

1001

101

Support

3600

72

2592

1001

102

Support

3600

72

2592

1001

103

Support

3600

72

2592

Table 3: Carves Calculation

Sales Order number

SO. Line No.

Line item

Ext Sell Price

(Allocatable)

      A

Ext. SSP

Price

 

RSP

 

*

Allocated

Price

   B

Carves

 

(B-A)

1001

101

Support

1200

2592

0.3333

2400

1200

1001

102

Support

2400

2592

0.3333

2400

0

1001

103

Support

3600

2592

0.3333

2400

-1200

 

 

 

Sum =7200

Sum=7776

 

 

 

In the above example, revenue is scheduled through the event “UPON BOOKING”. The Accounting entry is displayed below:

Table 4: Schedule Table

S. No

RC_ID

Line ID

Account Type

Amount

Currency

Dr

Cr

Period ID

Initial Reporting Entry Flag

1

1

101

Contract liability

1200

USD

1200

 

Jan-17

 

2

1

101

Revenue

1200

USD

 

1200

Jan-17

 

3

1

102

Contract liability

2400

USD

2400

 

Feb-17

 

4

1

102

Revenue

2400

USD

 

2400

Feb-17

 

5

1

103

Contract liability

3600

USD

3600

 

Feb-17

 

6

1

103

Revenue

3600

USD

 

3600

Feb-17

 

7

1

101

Adjustment Liability

1200

USD

 

1200

Jan-17

Y

8

1

103

Adjustment Liability

1200

USD

1200

 

Jan-17

Y

9

1

101

Adjustment Liability

1200

USD

1200

 

Jan-17

 

10

1

101

Adjustment Revenue

1200

USD

 

1200

Jan-17

 

11

1

103

Adjustment Liability

1200

USD

 

1200

Mar-17

 

12

1

103

Adjustment Revenue

1200

USD

1200

 

Mar-17

 

In the above example, revenue recognized at the end of the first period is 2400 (1200 contractual revenue + 1200 carve in revenue) and revenue recognized at the end of the second period is 4800 (1200 contractual revenue 1st Period + 1200 carve in revenue 1st Period + 2400 Contractual revenue for the 2nd period).

After recognizing the revenue for first two months, the third line of the contract gets canceled with the impairment flag “CONTRACT IMPAIRMENT”. Per the contract modification rule, it triggers prospective allocation for the revenue contract while cancelling the third line.

The Pre-requisite for the contract to get into any contract impairment type, the contract has to trigger prospective allocation while cancelling any of the line. 

Table 5: Impact of Line Item After Change

SO.NO

SO Line No

Line item

Ext List Price

Ext Sell Price

Start Date

End Date

Ext SSP

Price

(A)

Carves

 

(B)

Un-scheduled

Adj

10001

101

Support

3600

1200

01/01/2017

01/31/2017

0

0

0

10001

102

Support

3600

2400

02/01/2017

02/28/2017

0

0

0

10001

103

Support

3600

3600

03/01/2017

03/31/2017

0

0

-1200

The carve out of the canceled line becomes the impairment amount., Example of Accounting entry created while cancelling the third line with impairment flag “CONTRACT IMPAIRMENT “is given below:

Table 6: Schedule Table After Collection

S. No

RC_ID

Line ID

Account Type

Amount

Currency

Dr

Cr

Period ID

1

1

101

Contract liability

1200

USD

1200

 

Jan-17

2

1

101

Revenue

1200

USD

 

1200

Jan-17

3

1

102

Contract liability

2400

USD

2400

 

Feb-17

4

1

102

Revenue

2400

USD

 

2400

Feb-17

5

1

103

Contract liability

3600

USD

3600

 

Mar-17

6

1

103

Revenue

3600

USD

 

3600

Mar-17

7

1

101

Adjustment Liability

1200

USD

 

1200

Jan-17

8

1

103

Adjustment Liability

1200

USD

1200

 

Jan-17

9

1

101

Adjustment Liability

1200

USD

1200

 

Jan-17

10

1

101

Adjustment Revenue

1200

USD

 

1200

Jan-17

   13

1

103

Contract liability

3600  

 

 

3600

  1.  

14

1

103

  3600

TRD

3600  
  1.  

15

1

103

Adjustment Liability

1200

TRD

 

1200  

 

1

103

  1200

TRD

1200

 

  1.  

The entries marked in the green are created while collecting the canceled line three with impairment type flag “CONTRACT IMPAIRMENT”. The Unposted allocation recognition entry gets deleted (Line NO. 11& 12 of table 4).

New POB Created with Impairment Amount

In this type, new line gets created with POB as impairment for the value of impairment amount. The newly created line captures all the characteristics of the canceled line. Revenue of impairment amount is recognized based on the start date and end date of the canceled line and trigger for revenue release is Upon Booking.

The Revenue contract has three support lines, each for a month period starting from 01/01/2017 to 03/31/2017. The lines are grouped in to the same revenue contract based on the grouping logic in this example sales order number.

Table 7: Lines collected into RevPro

SO.NO

SO Line No

Line item

Ext List Price

Ext Sell Price

SSP Percentage

Start Date

End Date

Ext SSP

Price

(A)

Carves

 

(B)

2001

201

Support

3600

1200

72

01/01/2017

01/31/2017

2592

1200

2001

202

Support

3600

2400

72

02/01/2017

02/28/2017

2592

0

2001

203

Support

3600

3600

72

03/01/2017

03/31/2017

2592

-1200

When the above lines are collected in to RevPro system based on the grouping rule, Sales Order number 2001 and a Revenue Contract 2 gets created. The Initial entry for carves gets created either at the time of schedule created or at the time of billing document collected to the RevPro system. In this example, first line carve-in 1200 and third line carve-out 1200 is derived based on the calculation below:

Table 8: Extended SSP Price Calculation

SO.NO

SO Line No

Line item

Ext List Price

(A)

SSP Percentage

 

(B)

Ext. SSP

Price

(A*B/100)

2001

201

Support

3600

72

2592

2001

202

Support

3600

72

2592

2001

203

Support

3600

72

2592

Table 9: Carves Calculation

SO.NO

SO Line No

Line item

Ext Sell Price

(Allocatable)

      A

Ext. SSP

Price

 

RSP

 

*

Allocated

Price

   B

Carves

 

(B-A)

2001

201

Support

1200

2592

0.3333

2400

1200

2001

202

Support

2400

2592

0.3333

2400

0

2001

203

Support

3600

2592

0.3333

2400

-1200

 

 

 

Sum =7200

Sum=7776

 

 

 

* RSP = Ext SSP price/ Sum of EXT SSP price

In the above example, revenue is scheduled through the event “UPON BOOKING”. The Accounting entries are listed below:

Table 10

S. No

RC_ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period ID

Initial Reporting Entry Flag

1

2

201

Contract liability

1200

USD

1200

 

Jan-17

 

2

2

201

Revenue

1200

USD

 

1200

Jan-17

 

3

2

202

Contract liability

2400

USD

2400

 

Feb-17

 

4

2

202

Revenue

2400

USD

 

2400

Feb-17

 

5

2

203

Contract liability

3600

USD

3600

 

Feb-17

 

6

2

203

Revenue

3600

USD

 

3600

Feb-17

 

7

2

201

Adjustment Liability

1200

USD

 

1200

Jan-17

Y

8

2

203

Adjustment Liability

1200

USD

1200

 

Jan-17

Y

9

2

201

Adjustment Liability

1200

USD

1200

 

Jan-17

 

10

2

201

Adjustment Revenue

1200

USD

 

1200

Jan-17

 

11

2

203

Adjustment Liability

1200

USD

 

1200

Mar-17

 

12

2

203

Adjustment Revenue

1200

USD

1200

 

Mar-17

 

In the above example, revenue recognized at the end of the first period is 2400 (1200 contractual revenue + 1200 carve in revenue), revenue recognized at the end of the second period is 4800 (1200 contractual revenue 1st Period + 1200 carve in revenue 1st Period + 2400 Contractual revenue for the 2nd period).

 After recognizing the revenue for first two months, the third line of the contract gets canceled with the impairment flag “NEW POB”. Per the contract modification rule, it triggers prospective allocation for the revenue contract while cancelling the third line.

The Pre-requisite for the contract to get into any contract impairment type, the contract has to trigger prospective allocation while cancelling any of the line.

Table 11

SO.NO

SO Line No.

Line item

Ext List Price

Ext Sell Price

Start Date

End Date

Ext SSP

Price

 

(A)

Carves

 

(B)

Un-scheduled

Adj

Impairment  Amount

20001

201

Support

3600

1200

01/01/2017

01/31/2017

0

0

0

0

20001

202

Support

3600

2400

02/01/2017

02/28/2017

0

0

0

0

20001

203

Support

3600

3600

03/01/2017

03/31/2017

0

0

-1200

0

20001

204

 

  1.  
  1.  
  1.  
  1.  
  1.  
  1.  
  1.  
-1200

The carve out of the canceled line becomes the impairment amount. New line created for that amount with impairment as its POB is marked as green. The Impairment amount gets recognized based on the start and end date of the canceled line. See table below for the accounting entry created while cancelling the third line with impairment flag as “NEW POB“.

Table 12

S. No

RC_ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period ID

1

2

201

Contract liability

1200

USD

1200

 

Jan-17

2

2

201

Revenue

1200

USD

 

1200

Jan-17

3

2

202

Contract liability

2400

USD

2400

 

Feb-17

4

2

202

Revenue

2400

USD

 

2400

Feb-17

5

2

203

Contract liability

3600

USD

3600

 

Mar-17

6

2

203

Revenue

3600

USD

 

3600

Mar-17

7

2

201

Adjustment Liability

1200

USD

 

1200

Jan-17

8

2

203

Adjustment Liability

1200

USD

1200

 

Jan-17

9

2

201

Adjustment Liability

1200

USD

1200

 

Jan-17

10

2

201

Adjustment Revenue

1200

USD

 

1200

Jan-17

13

2

203

Contract Liability

3600

TRD

 

3600

Mar-17

14

2

203

 

3600

TRD

3600

 

Mar-17

15

2

203

Adjustment Liability

1200

TRD

 

1200

Mar-17

16

2

203

 

1200

TRD

1200

 

Mar-17

17

2

204

 

1200

TRD

 

1200

Mar-17

18

2

204

Adjustment Liability

1200

TRD

1200

 

Mar-17

19

2

204

Adjustment Liability

1200

TRD

 

1200

Mar-17

20

2

204

Adjustment Revenue

1200

TRD

1200

 

Mar-17

The entries marked in the green are created while collecting the canceled line three with impairment type flag “NEW POB”. The Unposted allocation recognition entry gets deleted (Line NO. 11& 12 of table 10). Impairment amount that gets debited in the canceled line and credit to the new line subsequently is moved to adjustment liability and then to adjustment revenue.  The NEW POB created with new line added has the name of IMPAIRMENT, which is a seeded POB. Revenue for the impairment POB gets recognized based on the start date and end date of the canceled line.

Impairment type Null -Impairment amount is left out in the Revenue Contract. In this type, the impairment amount is omitted in the revenue contract. Customer has a choice to do customization what kind of treatment given for this amount.

The Revenue contract has three support lines, each for a month period starting from 01/01/2017 to 03/31/2017. The lines are grouped in to same revenue contract based on the grouping logic in this example Sales Order number.

Table 13

SO.NO

SO Line No.

Line item

Ext List Price

Ext Sell Price

SSP Percentage

Start Date

End Date

Ext. SSP

Price

(A)

Carves

 

(B)

3001

301

Support

3600

1200

72

01/01/2017

01/31/2017

259200

1200

3001

302

Support

3600

2400

72

02/01/2017

02/28/2017

259200

0

3001

303

Support

3600

3600

72

03/01/2017

03/31/2017

259200

-1200

When the above lines are collected in to RevPro system based on the grouping rule, Sales Order number 2001 and a revenue contract 3 gets created. The Initial entry for carves gets created either at the time of schedule creation or at the time of billing document collection in to the RevPro system. In this example, first line carve-in 1200 and third line carve-out 1200 are derived based on the calculation below:

Table 14 Extended SSP Price Calculation

SO.NO

SO Line No.

Line item

Ext List Price

(A)

SSP Percentage

 

(B)

Ext. SSP

Price

(A*B/100)

3001

301

Support

3600

72

2592

3001

302

Support

3600

72

2592

3001

303

Support

3600

72

2592

Table 15: Carves Calculation

SO NO

SO Line No.

Line item

Ext Sell Price

(Allocatable)

      A

Ext. SSP

Price

 

RSP

 

*

Allocated

Price

   B

Carves

 

(B-A)

3001

301

Support

1200

2592

0.3333

2400

1200

3001

302

Support

2400

2592

0.3333

2400

0

3001

303

Support

3600

2592

0.3333

2400

-1200

 

 

 

Sum =7200

Sum=7776

 

 

 

* RSP = Ext SSP price/ Sum of EXT SSP price

In the above example, revenue is scheduled through the event “UPON BOOKING”. The Accounting entry are as follows:

Table 16

S. No

RC_ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period ID

Initial Reporting Entry Flag

1

3

301

Contract liability

1200

USD

1200

 

Jan-17

 

2

3

301

Revenue

1200

USD

 

1200

Jan-17

 

3

3

302

Contract liability

2400

USD

2400

 

Feb-17

 

4

3

302

Revenue

2400

USD

 

2400

Feb-17

 

5

3

303

Contract liability

3600

USD

3600

 

Feb-17

 

6

3

303

Revenue

3600

USD

 

3600

Feb-17

 

7

3

301

Adjustment Liability

1200

USD

 

1200

Jan-17

Y

8

3

303

Adjustment Liability

1200

USD

1200

 

Jan-17

Y

9

3

301

Adjustment Liability

1200

USD

1200

 

Jan-17

 

10

3

301

Adjustment Revenue

1200

USD

 

1200

Jan-17

 

11

3

303

Adjustment Liability

1200

USD

 

1200

Mar-17

 

12

3

303

Adjustment Revenue

1200

USD

1200

 

Mar-17

 

In the above example, revenue recognized at the end of the first period is 2400 (1200 contractual revenue + 1200 carve in revenue) and revenue recognized at the end of the second period is 4800 (1200 contractual revenue 1st Period + 1200 carve in revenue 1st Period + 2400 Contractual revenue for the 2nd period).

After recognizing the revenue for first two months, the third line of the contract gets canceled with the impairment flag type Null. Per the contract modification rule, it triggers prospective allocation for the revenue contract while cancelling the third line.

The Pre-requisite for the contract to get into any contract impairment type, the contract has to trigger prospective allocation while cancelling any of the line.

Table 17

SO.NO

SO Line No

Line item

Ext List Price

Ext Sell Price

Start Date

End Date

Ext SSP

Price

 

(A)

Carves

 

 

(B)

Un-scheduled

Adj

30001

301

Support

3600

1200

01/01/2017

01/31/2017

0

0

0

30001

302

Support

3600

2400

02/01/2017

02/28/2017

0

0

0

30001

303

Support

3600

3600

03/01/2017

03/31/2017

0

0

-1200

The carve out of the canceled line becomes the impairment amount that is left out in the revenue contract and it gives provision for the customers to do customization. The accounting entry created while cancelling the third line with impairment flag as null value is listed below:

Table 18

S. No

RC_ID

Line_Id

Account Type

Amount

Currency

Dr

Cr

Period ID

1

3

301

Contract liability

1200

USD

1200

 

Jan-17

2

3

301

Revenue

1200

USD

 

1200

Jan-17

3

3

302

Contract liability

2400

USD

2400

 

Feb-17

4

3

302

Revenue

2400

USD

 

2400

Feb-17

5

3

303

Contract liability

3600

USD

3600

 

Mar-17

6

3

303

Revenue

3600

USD

 

3600

Mar-17

7

3

301

Adjustment Liability

1200

USD

 

1200

Jan-17

8

3

303

Adjustment Liability

1200

USD

1200

 

Jan-17

9

3

301

Adjustment Liability

1200

USD

1200

 

Jan-17

10

3

301

Adjustment Revenue

1200

USD

 

1200

Jan-17

13

3

303

Contract Liability

1200

TRD

 

1200

1

14

3

303

 

1200

TRD

1200

 

1

The entries marked in green are created while collecting the canceled line three with impairment type flag as blank. The Unposted allocation recognition entry gets deleted (Line NO. 11& 12 of table 16).

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