Contract impairment

Knowledge Center > Zuora RevPro > Contract modifications > Contract impairment

Contract impairment

The contract gets into the impairment state when the lines of the contract are canceled after part or full of the revenue has been recognized. RevPro handles contract impairment in different ways based on the impairment type flag value that is populated when the canceled line is collected by RevPro.

The values of the impairment type flag can be one of the following:

  • Contract Impairment
    The impairment amount goes to the impairment account type.
  • New POB
    The impairment amount creates a new line with a new POB.
  • Null
    The impairment amount is left out in the revenue contract.

For a contract to get into any of the above contract impairment types, the contract must trigger prospective allocation based on the contract modification rule set for line cancelation.

The following sections provide examples of how different impairment types are processed in RevPro.

Contract Impairment

When the impairment flag value is Contract Impairment, the impairment amount goes to the impairment account type.

In the following example, a revenue contract has three support lines and starts from January 1 to March 31, 2019. Each line lasts for a period of one month. These support lines are grouped into the same revenue contract based on the RC grouping template, which uses the sales order number as the grouping logic. 

Table 1: Sales order lines collected into RevPro

SO No.

SO Line No.

Line item

Ext. List Price

Ext. Sell Price

SSP %

Start Date

End Date

1001

101

Support

3600

1200

72

01/01/2019

31/01/2019

1001

102

Support

3600

2400

72

01/02/2019

28/02/2019

1001

103

Support

3600

3600

72

01/03/2019

31/03/2019

The initial entry for carves is created either at the time of schedule creation or at the time of billing when data is collected by RevPro. First, Ext. SSP Price for each line is calculated based on the following formula:

Ext. SSP Price = Ext. List Price * SSP %

Table 2: Extended SSP price calculation

SO No.

SO Line No.

Line Item

Ext. List Price

(A)

SSP %

(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

Total 7776

Then, the RSP is calculated based on the following formula for each line:

RSP = Ext. SSP Price/Sum of Ext. SSP Price

The Allocated Price is calculated based on the following formula:

Allocated Price = Sum of Ext. Sell Price * RSP

The carve-in amount for the first line and the carve-out amount for the third line are derived.

Table 3: Carves calculation

SO No.

SO Line No.

Line item

Ext. Sell Price

(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

Total 7200 7776      

The revenue is scheduled based on the UPON BOOKING release event. The accounting entries are shown as follows.

Table 4: Accounting entries

S. No

RC ID

Line ID

Account Type

Amount

Currency

Dr

Cr

Period

Initial Reporting Entry Flag

1

1

101

Contract liability

1200

USD

1200

 

Jan-19

 

2

1

101

Revenue

1200

USD

 

1200

Jan-19

 

3

1

102

Contract liability

2400

USD

2400

 

Feb-19

 

4

1

102

Revenue

2400

USD

 

2400

Feb-19

 

5

1

103

Contract liability

3600

USD

3600

 

Feb-19

 

6

1

103

Revenue

3600

USD

 

3600

Feb-19

 

7

1

101

Adjustment Liability

1200

USD

 

1200

Jan-19

Y

8

1

103

Adjustment Liability

1200

USD

1200

 

Jan-19

Y

9

1

101

Adjustment Liability

1200

USD

1200

 

Jan-19

 

10

1

101

Adjustment Revenue

1200

USD

 

1200

Jan-19

 

11

1

103

Adjustment Liability

1200

USD

 

1200

Mar-19

 

12

1

103

Adjustment Revenue

1200

USD

1200

 

Mar-19

 

The revenue recognized at the end of January is 2400 (1200 contractual revenue + 1200 carve-in revenue). The revenue recognized at the end of February is 4800 (1200 contractual revenue for the 1st period + 1200 carve-in revenue for the 1st period + 2400 contractual revenue for the 2nd period).

After the revenue has been recognized for two months, the third line of the contract is canceled with the impairment flag being CONTRACT IMPAIRMENT. Based on the contract modification rule, it triggers prospective allocation for the revenue contract.

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)

Unscheduled

Adjustment

10001

101

Support

3600

1200

01/01/2019

31/01/2019

0

0

0

10001

102

Support

3600

2400

01/02/2019

28/02/2019

0

0

0

10001

103

Support

3600

3600

01/03/2019

31/03/2019

0

0

-1200

The carve-out amount of the canceled line becomes the impairment amount. The accounting entries that are created when the third line is canceled with the CONTRACT IMPAIRMENT flag are shown as follows:

Table 6: Schedule after collection

S. No

RC_ID

Line ID

Account Type

Amount

Currency

Dr

Cr

Period

1

1

101

Contract Liability

1200

USD

1200

 

Jan-19

2

1

101

Revenue

1200

USD

 

1200

Jan-19

3

1

102

Contract Liability

2400

USD

2400

 

Feb-19

4

1

102

Revenue

2400

USD

 

2400

Feb-19

5

1

103

Contract Liability

3600

USD

3600

 

Mar-19

6

1

103

Revenue

3600

USD

 

3600

Mar-19

7

1

101

Adjustment Liability

1200

USD

 

1200

Jan-19

8

1

103

Adjustment Liability

1200

USD

1200

 

Jan-19

9

1

101

Adjustment Liability

1200

USD

1200

 

Jan-19

10

1

101

Adjustment Revenue

1200

USD

 

1200

Jan-19

13

1

103

Contract Liability

3600 USD

 

3600

Mar-19

14

1

103

  3600

USD

3600  

Mar-19

15

1

103

Adjustment Liability

1200

USD

 

1200 Mar-19

16

1

103

  1200

USD

1200

 

Mar-19

New entries are created when cancelation of the third line is collected with the CONTRACT IMPAIRMENT flag. The unposted allocation recognition entries are deleted, which are line 11 and 12 in Table 4.

New POB

When the impairment flag value is New POB, a new line is created with a POB as impairment for the impairment amount. The new line captures all the characteristics of the canceled line. Revenue of the impairment amount is recognized based on the start date and end date of the canceled line and the trigger for revenue release is Upon Booking.

In the following example, the revenue contract has three support lines and starts from January 1 to March 31, 2019. Each line lasts for a month period. The three lines are grouped into the same revenue contract based on the RC grouping template, which uses the sales order number as the grouping logic. 

Table 7: Lines collected into RevPro

SO

No.

SO Line No.

Line Item

Ext. List Price

Ext. Sell Price

SSP %

Start Date

End Date

2001

201

Support

3600

1200

72

01/01/2019

31/01/2019

2001

202

Support

3600

2400

72

01/02/2019

28/02/2019

2001

203

Support

3600

3600

72

01/03/2019

31/03/2019

The initial entry for carves is created either at the time of schedule creation or at the time of billing when data is collected by RevPro. First, Ext. SSP Price for each line is calculated based on the following formula:

Ext. SSP Price = Ext. List Price * SSP %

Table 8: Extended SSP price calculation

SO

No.

SO Line No.

Line Item

Ext. List Price

(A)

SSP %

(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

Then, the RSP is calculated based on the following formula for each line:

RSP = Ext. SSP Price/Sum of Ext. SSP Price

The Allocated Price is calculated based on the following formula:

Allocated Price = Sum of Ext. Sell Price * RSP

The carve-in amount for the first line and the carve-out amount for the third line are derived.

Table 9: Carves calculation

SO

No.

SO Line No.

Line Item

Ext. Sell Price

(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

Total

7200

7776

 

 

 

The revenue is scheduled based on the UPON BOOKING release event. The accounting entries are listed as follows:

Table 10: Schedule

S. No

RC ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period

Initial Reporting Entry Flag

1

2

201

Contract liability

1200

USD

1200

 

Jan-19

 

2

2

201

Revenue

1200

USD

 

1200

Jan-19

 

3

2

202

Contract liability

2400

USD

2400

 

Feb-19

 

4

2

202

Revenue

2400

USD

 

2400

Feb-19

 

5

2

203

Contract liability

3600

USD

3600

 

Feb-19

 

6

2

203

Revenue

3600

USD

 

3600

Feb-19

 

7

2

201

Adjustment Liability

1200

USD

 

1200

Jan-19

Y

8

2

203

Adjustment Liability

1200

USD

1200

 

Jan-19

Y

9

2

201

Adjustment Liability

1200

USD

1200

 

Jan-19

 

10

2

201

Adjustment Revenue

1200

USD

 

1200

Jan-19

 

11

2

203

Adjustment Liability

1200

USD

 

1200

Mar-19

 

12

2

203

Adjustment Revenue

1200

USD

1200

 

Mar-19

 

The revenue recognized at the end of January is 2400 (1200 contractual revenue + 1200 carve in revenue). The revenue recognized at the end of February is 4800 (1200 contractual revenue for the first period + 1200 carve-in revenue for the first period + 2400 contractual revenue for the second period).

After the revenue has been recognized for two months, the third line of the contract is canceled with the impairment flag being NEW POB. Based on the contract modification rule, it triggers prospective allocation for the revenue contract.

Table 11: 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)

Unscheduled

Adjustment

Impairment  Amount

20001

201

Support

3600

1200

01/01/2019

31/01/2019

0

0

0

0

20001

202

Support

3600

2400

01/02/2019

28/02/2019

0

0

0

0

20001

203

Support

3600

3600

01/03/2019

31/03/2019

0

0

-1200

0

20001

204

 

0

0

01/03/2019

 03/31/2019

0

0

0

-1200

The carve-out amount of the canceled line becomes the impairment amount. A new line is created for that amount with impairment as its POB. The Impairment amount is recognized based on the start and end date of the canceled line. See the table below for the accounting entries created when the third line is canceled with the impairment flag being NEW POB.

Table 12: Schedule after collection

S. No

RC ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period

1

2

201

Contract Liability

1200

USD

1200

 

Jan-19

2

2

201

Revenue

1200

USD

 

1200

Jan-19

3

2

202

Contract Liability

2400

USD

2400

 

Feb-19

4

2

202

Revenue

2400

USD

 

2400

Feb-19

5

2

203

Contract Liability

3600

USD

3600

 

Mar-19

6

2

203

Revenue

3600

USD

 

3600

Mar-19

7

2

201

Adjustment Liability

1200

USD

 

1200

Jan-19

8

2

203

Adjustment Liability

1200

USD

1200

 

Jan-19

9

2

201

Adjustment Liability

1200

USD

1200

 

Jan-19

10

2

201

Adjustment Revenue

1200

USD

 

1200

Jan-19

13

2

203

Contract Liability

3600

USD

 

3600

Mar-19

14

2

203

 

3600

USD

3600

 

Mar-19

15

2

203

Adjustment Liability

1200

USD

 

1200

Mar-19

16

2

203

 

1200

USD

1200

 

Mar-19

17

2

204

 

1200

USD

 

1200

Mar-19

18

2

204

Adjustment Liability

1200

USD

1200

 

Mar-19

19

2

204

Adjustment Liability

1200

USD

 

1200

Mar-19

20

2

204

Adjustment Revenue

1200

USD

1200

 

Mar-19

New entries are created when the cancelation of the third line is collected with the NEW POB impairment type flag. The unposted allocation recognition entries are deleted, which are line 11 and 12 in Table 10.

The impairment amount that gets debited in the canceled line and subsequently credited to the new line is moved to the adjustment liability account and then to the adjustment revenue account. The new POB created with the new line has the name of IMPAIRMENT, which is a seeded POB. The revenue for the impairment POB is recognized based on the start date and end date of the canceled line.

Null

When the impairment type flag is blank, the impairment amount is left out in the revenue contract. You can choose to customize the treatment for the impairment amount.

In the following example, the revenue contract has three support lines and starts from January 1 to March 31, 2019. Each line lasts for a month period. The lines are grouped into the same revenue contract based on the RC grouping template, which uses the SO number as the grouping logic.

Table 13: Lines collected to RevPro

SO No.

SO Line No.

Line Item

Ext. List Price

Ext. Sell Price

SSP %

Start Date

End Date

3001

301

Support

3600

1200

72

01/01/2019

31/01/2019

3001

302

Support

3600

2400

72

01/02/2019

28/02/2019

3001

303

Support

3600

3600

72

01/03/2019

31/03/2019

The initial entry for carves is created either at the time of schedule creation or at the time of billing when data is collected by RevPro. First, Ext. SSP Price for each line is calculated based on the following formula:

Ext. SSP Price = Ext. List Price * SSP %

Table 14: Extended SSP price calculation

SO No.

SO Line No.

Line Item

Ext List Price

(A)

SSP %

(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

Then, the RSP is calculated based on the following formula for each line:

RSP = Ext. SSP Price/Sum of Ext. SSP Price

The Allocated Price is calculated based on the following formula:

Allocated Price = Sum of Ext. Sell Price * RSP

The carve-in amount for the first line and the carve-out amount for the third line are derived.

Table 15: Carves calculation
SO No.

SO Line No.

Line Item

Ext Sell Price

(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

Total

7200

7776

 

 

 

The revenue is scheduled based on the UPON BOOKING release event. The accounting entries are as follows:

Table 16: Schedule

S. No

RC ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period

Initial Reporting Entry Flag

1

3

301

Contract liability

1200

USD

1200

 

Jan-19

 

2

3

301

Revenue

1200

USD

 

1200

Jan-19

 

3

3

302

Contract Liability

2400

USD

2400

 

Feb-19

 

4

3

302

Revenue

2400

USD

 

2400

Feb-19

 

5

3

303

Contract Liability

3600

USD

3600

 

Feb-19

 

6

3

303

Revenue

3600

USD

 

3600

Feb-19

 

7

3

301

Adjustment Liability

1200

USD

 

1200

Jan-19

Y

8

3

303

Adjustment Liability

1200

USD

1200

 

Jan-19

Y

9

3

301

Adjustment Liability

1200

USD

1200

 

Jan-19

 

10

3

301

Adjustment Revenue

1200

USD

 

1200

Jan-19

 

11

3

303

Adjustment Liability

1200

USD

 

1200

Mar-19

 

12

3

303

Adjustment Revenue

1200

USD

1200

 

Mar-19

 

The revenue recognized at the end of January is 2400 (1200 contractual revenue + 1200 carve in revenue). The revenue recognized at the end of February is 4800 (1200 contractual revenue for the first period + 1200 carve-in revenue for the first Period + 2400 contractual revenue for the second period).

After the revenue has been recognized for two months, the third line of the contract is canceled with the blank impairment flag type. Based on the contract modification rule, it triggers prospective allocation for the revenue contract.

Table 17: 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)

Unscheduled

Adjustment

30001

301

Support

3600

1200

01/01/2019

31/01/2019

0

0

0

30001

302

Support

3600

2400

01/02/2019

28/02/2019

0

0

0

30001

303

Support

3600

3600

01/02/2019

31/03/2019

0

0

-1200

The carve-out amount of the canceled line becomes the impairment amount, which is left out in the revenue contract. It gives provision for you to do customization. The accounting entries that are created when the third line is canceled with the impairment flag being null are listed below:

Table 18: Schedule after collection

S. No

RC ID

Line Id

Account Type

Amount

Currency

Dr

Cr

Period

1

3

301

Contract Liability

1200

USD

1200

 

Jan-19

2

3

301

Revenue

1200

USD

 

1200

Jan-19

3

3

302

Contract Liability

2400

USD

2400

 

Feb-19

4

3

302

Revenue

2400

USD

 

2400

Feb-19

5

3

303

Contract Liability

3600

USD

3600

 

Mar-19

6

3

303

Revenue

3600

USD

 

3600

Mar-19

7

3

301

Adjustment Liability

1200

USD

 

1200

Jan-19

8

3

303

Adjustment Liability

1200

USD

1200

 

Jan-19

9

3

301

Adjustment Liability

1200

USD

1200

 

Jan-19

10

3

301

Adjustment Revenue

1200

USD

 

1200

Jan-19

13

3

303

Contract Liability

1200

USD

 

1200

Mar-19

14

3

303

 

1200

USD

1200

 

Mar-19

The bottom two entries are created when cancelation of the third line is collected with the blank impairment flag. The unposted allocation recognition entries are deleted, which are line 11 and 12 in Table 16.

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