Processing Performance Obligations

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Processing Performance Obligations

An item that is sold by a company such as a ‘good’ or ‘service’ may also be referred to as an
element or line within a revenue contract with a customer. The new ASC 606 guidance
requires the identification of the revenue contract as the first step in performing revenue
recognition. Items sold to a customer must first be grouped into a revenue contract. Next, the
lines within the revenue contract must be grouped into promises made to the customer or as the
guidance refers to these promises as Performance Obligations(POB). Revenue is recognized as or
when the performance obligation is fulfilled satisfied.

In this document, the following topics are covered:

  • Performance Obligation Processing
  • Performance Obligation Template
  • Advanced Rule
  • Assignment by Attributes
  • Assignment by Item/SKU#
  • Auto POB - If a line is not satisfying Advance Rule, POB by Attributes or by Item/SKU, then Auto POB is created.

Performance Obligation Processing

It is important to note that companies have four ways to assign a performance obligation
template to lines within a revenue contract. A performance obligation template determines the
revenue recognition pattern for the performance obligations and may also define cost(s)
treatment, variable consideration assignment, and any performance obligation(s) dependencies
(if applicable).
Four ways to assign a performance obligation template to lines within a revenue contract are as follows:

  1. Advance Rule - This is used for more complex performance obligation templates.
  2. Assignment - By Attributes (used when there is a one-to-one line to POB relationship and POB assignment can be based on more aggregated attributes than Item/SKU#)
  3. Assignment - By Item/SKU# (used when there is a one-to-one line to POB relationship)
  4. Auto POB - Revenue User performs this manually after automatic assignment. POB template must be configured for manual application. 

RevPro identifies the correct performance obligation template (to assign to lines within a revenue contract to a performance obligation template) by attempting all available rules(setups) in the following order:

  1. Advance Rule
  2. Assignment - By Attributes
  3. Assignment - By Item/SKU#

If RevPro does not find a rule to assign a performance obligation template then, by default, RevPro assigns the Auto POB template (POB Advance Rule Hierarchy Exceptions).

Performance obligations templates are based on both what goods and/or services that the company sells and how the company is expected to fulfill these performance obligations. A company identifies its performance obligation(s) by examining its company's accounting policies, master product list, and information from their revenue contracts with customers. In Zuora RevPro, performance obligations are defined by POB template(s) and POB Assignment Rule(s). The performance obligation templates drive all revenue recognition processing activity that includes revenue treatment, cost assignment and treatment and/or variable consideration assignment and forecasting.

POB Template Assignment POB Relationship Description
POB Advance Rule

one to one 

or one to many

Used for more complex performance obligation templates assignments (for example, when more than one sales transaction source line in a single POB). RevPro, when identifying POB(s) within a revenue contract, always attempts to apply the
advance rule(s) first. If none are applicable, RevPro then attempts Assignment - By Attributes.
By Attributes one to one Used when there is a one-to-one SO line to POB relationship and POB assignment can be based on more aggregated attributes than Item ID only. RevPro attempts Assignment - By Attributes (POB assignment rules). If none are applicable, RevPro then attempts Assignment - By Item/SKU ID.
Assignment - By Item/SKU # one to one Used when there is a one-to-one SO line to POB
relationship. RevPro attempts Assignment - By
Item ID (POB assignment rules). If none are
applicable, RevPro then assigns the AUTO POB
template to the Sales Order line.
Manual one to one Must be performed manually by the Revenue User
after automatic assignment. The POB
template must be configured for manual application.

Performance Obligation Template

While processing Performance Obligations, you can release the unreleased revenue for revenue recognition. When the transaction source data is uploaded into RevPro then, the RC Grouping Template identifies which sales order lines to group into revenue contracts. RevPro examines the revenue contract to identify the performance obligations within the revenue contract. RevPro uses
performance obligations rules (by advance rule, attribute or Item/SKU) to group sales order lines
within each revenue contract into performance obligations. Four ways to assign a performance obligation template to lines within a revenue
Do the following to create or edit a POB template:

POB template.jpg

  1. Navigate to Policies > Performance Obligations.
  2. From the POB Templates pane, select an existing POB or click New Template button to create a new template.
  3. In the Revenue Treatment pane, select the following:
    1. Select the Release Event as Upon Booking, Upon Billing, Manual, or Event Name.
    2. Select the Ratable Method, Accounting Method, and POB Satisfied parameters.
    3. Select if you wish to allow manual release or manual application.

When a line is collected, RevPro tries to associate itself first with the Advanced Rule. If the attributes does not match, then the second association is tried with the attributes and then next with the Item. When a match is found, then the corresponding POB template properties are considered for the release of the revenue, cost, or VC.

Advance Rule

Advance Rule.jpg

When the other attributes does not match with the collected line, then RevPro moves to the Advance Rule screen. If the attributes are matching, then you can select the POB template that you want to associate with the line.

Perform the following steps to associate the POB template with the Advance Rule.

  1. Navigate to Policies > Performance Obligations.
  2. Select the Advance Rule pane to view the rules.
  3. Select a particular rule and right-click to edit the rule.
  4. Select the parameters present in the Goods and Services pane. 
  5. Click to save the changes made to the parameters. Whenever there is an update made to the existing rule, the Version No of the rule is incremented by 1.
  6. If the parameters of the rule matches with the collected line, select the POB template that you want to associate with the rule in the POB Template field.
  7. Click Save.

Assignment - By Attributes

The second automated way to assign a POB template is by using the Assignment - By
Attributes setup. This may be used when there is a one-to-one line to POB relationship
and POB assignment can be based on more aggregated attributes than Item/SKU#. This
is the most common approaches used to assign performance obligation templates.

Assignment - By Item/SKU#

Zuora RevPro allows a Revenue User to upload a list of Items numbers to create
performance obligation rules. In this way, a Revenue User would avoid the need to create POB
assignment rules manually if a master product list were to contain hundreds or thousands of
Item IDs. If a company has a large master product list that contains thousands of item IDs,
Zuora RevPro has the capability whereby you can upload a master product list along with the naming convention for the POB and the POB template name, and Zuora RevPro can create the ‘1-to-1’ relationship between the performance obligation and the item’s ID using the performance obligation template Assignment - By Item/SKU # approach.

Auto POB

AUTO POB template is assigned by RevPro when no applicable POB assignment
rules are configured by the company. This is to ensure every sales order
transaction line is initially assigned to a performance obligation. Auto POB template is always assigned based on one sales order transaction line to one Auto POB performance obligation. RevPro does not display a POB rule in the GUI for the assignment of Auto POB.

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