Revenue Recognition Conversion Question

Source

Say you have sold service or subscription for entire year in advance. Example is the yearly subscription price I pay in advance for my HBR copy. I pay about 144 USD in advance. What HBR does with this advance payment I make? Basically they had an invoice created on my name for that amount. But since the magazine needs to be delivered 12 months into the future, they have to recognize the revenue appropriately every month for each issue that is delivered. They cannot recognize the revenue in one month for all the144 USD. But I have already paid for it so they apply cash to this invoice thus bringing down the receivables to zero.

Imagine if HBSP was using a legacy system when I was a subscriber and would like to move to Oracle in the middle of my subscription. My subscription is from Jan-09 to Jan-10 and if they are migrating in Aug-09, how will this invoice converted?

In general this invoice is not considered as open because I have already paid for it (usually we convert open invoices only). So the invoice that is converted should have zero outstanding balance but outstanding revenue or in other words deferred or unearned revenue.

Why is this hard? The reason is accounting. Let us take the same example and create accounting entries for the same. In the first month when the invoice is created here is the entry.

Account	GL Date	Cr	Dr
Unearned Revenue  Account	01-Jan-2009	144
Receivables Account	01-Jan-2009		144
Unearned Revenue Account	01-Feb-2009		12
Revenue Account	01-Feb-2009	12
Unearned Revenue Account	01-Mar-2009		12
Revenue Account	01-Mar-2009	12
Unearned Revenue Account	01-Apr-2009		12
Revenue Account	01-Apr-2009	12
Unearned Revenue Account	01-May-2009		12
Revenue Account	01-May-2009	12
Unearned Revenue Account	01-Jun-2009		12
Revenue Account	01-Jun-2009	12
Unearned Revenue Account	01-Jul-2009		12
Revenue Account	01-Jul-2009	12
Unearned Revenue Account	01-Aug-2009		12
Revenue Account	01-Aug-2009	12
Unearned Revenue Account	01-Sep-2009		12
Revenue Account	01-Sep-2009	12
Unearned Revenue Account	01-Oct-2009		12
Revenue Account	01-Oct-2009	12
Unearned Revenue Account	01-Nov-2009		12
Revenue Account	01-Nov-2009	12
Unearned Revenue Account	01-Dec-2009		12
Revenue Account	01-Dec-2009	12
Unearned Revenue Account	01-Jan-2010		12
Revenue Account	01-Jan-2010	12

Since the one issue of the magazine will be delivered in this month they need to recognize 12 USD in the month of Jan-09. Also mind that I am paying this invoice. Accounting entries are:

When cash is applied against the invoice:

Account	GL Date	Cr	Dr
Receivables  Account	01-Jan-2009	144
Cash Account	01-Jan-2009		144

When revenue is recognized:

Account	GL Date	Cr	Dr
Revenue  Account	01-Jan-2009	12
Unearned Revenue  Account	01-Jan-2009		12

And this recognition continues till August in the legacy system. In August when we convert the invoice into Oracle, how to convert this? Should we convert the entire balance of receivables and unearned revenue or only the remaining unearned revenue about should be the amount in the invoice to convert?

In general cases are:

1.     Invoice is completely paid, and unearned amount is greater than receivables amount (receivables is zero)

2.     Invoice is partially paid and remaining receivable balance is less than the remaining unearned amount.

3.     Invoice is partially paid and the open balance on the invoice is more than the unearned amount.

Two important things to keep in mind are: how much should be the invoice value in all these cases? This question is relevant because receivables balance is not the same as the original invoice amount in the legacy system. And the second question is which GL date to use? And we need an accounting rule to make this happen. As invoices in the legacy can have different number of periods to recognize revenue, we define this rule as Variable type? As we schedule the revenue as soon the revenue recognition is run, we do not check the deferred flag in the accounting rule.

You can convert the invoice amount as is from the legacy and then use adjustments to reduce the receivables balance to appropriate number(zero or partial).  As for the revenue use the rule start date as the equal to the transaction date (as it is in the source). If you keep only current period open gl date will be current for all the past revenue (when revenue recognition is run) and future date for the future periods as per the schedule till the end of it. The future revenue will be recognized on that appropriate date.

But again this falls into bigger picture of your migration strategy and depends on how you convert GL balances for these accounts.