Revenue and COGS Matching

Revenue and COGS Matching
Overview
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Objectives

Agenda

Overview
Overview of Revenue / COGS Matching

The revenue recognition principle requires revenues to be recognized when a firm has
performed all, or a substantial portion of services to be provided, and cash receipt is reasonably
certain. The Matching Principle requires that revenue and its associated cost of goods sold
must be recognized in the same accounting period.
The value of goods shipped from inventory go into a Deferred COGS account. As percentages
of revenue are recognized, a matching percentage of the value of goods shipped from inventory
is transferred from the Deferred COGS account to the COGS account. This synchronizes the
recognition of revenue and COGS in accordance with the recommendations of generally
accepted accounting principles (GAAP).
The Oracle e-Business Suite supports this matching principle by synchronizing the recognition
of cost of goods sold (COGS) with the revenue recognized in Oracle Receivables for shipments
made in Oracle Order Management or other order fulfillment systems. With this feature, sales
order revenue and the associated COGS are recognized in the same period. In addition, when
sales order revenue is only partially recognized, the associated COGS is recognized in the same
proportion.

Agenda

Setting Up Revenue / COGS Matching
Setting Up Revenue / COGS Matching

1. Navigate to the Organization Parameters window and select the Other Accounts tab.
(N) Inventory > Setup > Organizations > Parameters (T) Other Accounts
2. Enter the Deferred COGS Account. There is no default for this account.
Specify a Deferred COGS Account for each organization.

Agenda

Revenue / COGS Recognition Methodology
Revenue / COGS Recognition Methodology

The following describes how Oracle Cost Management synchronizes the recognition of earned
COGS to earned sales order revenue in a variety of business scenarios.
1. Revenue / COGS recognition main business flow
• At sales order shipment, order lines are costed and booked to a Deferred Cost of Goods
Sold (COGS) account. This account is subsequently adjusted for any change in the
percentage of earned or recognized revenue associated with the sales order lines. This is
done to ensure that amount of earned COGS is recognized proportionately as the amount
of earned revenue.
• You run a set of concurrent processes to record sales order and revenue recognition
transactions and to create and cost COGS recognition transactions. These COGS
recognition transactions adjust deferred and earned COGS in an amount that synchronizes
the % of earned COGS to earned revenue on sales order shipment lines.
- Record Order Management Transactions: records new sales order transaction activity
such as shipments and RMA returns in Oracle Order Management.
- Collect Revenue Recognition Information: determines the percentage of recognized
or arned revenue related to invoiced sales order shipment lines in Oracle Receivables.

- Generate COGS Recognition Events: creates and costs COGS recognition events for
new sales order shipments/returns and changes in revenue recognition and credits for
invoiced sales order shipment lines.
• COGS recognition events are created for:
- Invoiceable and shippable order lines.
- Configured items: invoiceable (parent) line if it has any shippable but not invoiceable
children.
- A shippable non-invoiceable line that has no invoiceable parent.
• A COGS recognition event generates a COGS recognition transaction whose date and
time stamp is the end of day as specified in the inventory organization's legal entity time
zone.
• A rejected acceptance-enabled sales order line will not interface with Oracle Receivables
and Oracle Order Management.
• An RMA receipt will result in a credit to total COGS (split appropriately between deferred
COGS and COGS if necessary) with a debit to inventory.
2. Customer acceptance only affects Costing indirectly, in that:
• It is a revenue recognition contingency for an order line.
• A rejected sales order line means all shipped quantities for that line will never be invoiced
in A/R. When you close this order line, Order Management flags this as an uninvoiced
line. When this occurs, Cost Management moves the balance of the sales order line from
deferred COGS to COGS.
3. There is no accounting when a sales order line is rejected. Costing only creates
accounting when the rejected items are received and then either delivered to a regular
or a scrap asset subinventory.
4. In customer drop ship scenarios with advanced accounting, revenue / COGS matching
occurs only in the customer-facing organization. If advanced accounting is not enabled,
revenue and COGS matching does not occur. Costing books the entire sales order
shipment amount to COGS.

Agenda

COGS Recognition and Concurrent Processes
COGS Recognition and Concurrent Processes

The matching and synchronization of the earned and deferred components of sales order
revenue and COGS is accomplished by running the following COGS recognition concurrent
processes at user-defined intervals:
• Record Order Management Transactions
• Collect Revenue Recognition Information
• Generate COGS Recognition Events
(N) Cost > COGS Recognition
Record Order Management Transactions

The Record Order Management Transactions concurrent process picks up and costs all
uncosted sales order issue and RMA return transactions and creates a record for each new order
line in the costing COGS recognition matching table. This process is not mandatory. If you
don't run this process, then the cost processor will select and cost the uncosted sales order
issues and insert them in the COGS matching table. This process can be used if you need to
process the COGS recognition transactions at shorter intervals than the cost processor.

Note: This concurrent request has no parameters.
Collect Revenue Recognition Information

The Collect Revenue Recognition Information concurrent process calls an Oracle Receivables
API to retrieve the latest revenue recognition percentage of all invoiced sales order lines in
Oracle receivables whose activity date is within a user-specified date range. This process must
be run before the Generate COGS Recognition Event concurrent process.
Generate COGS Recognition Events

The Generate COGS Recognition Events concurrent request compares the COGS recognition
percentage for each sales order line and accounting period combination to the current earned
revenue percentage. When the compared percentages are different, the process raises a COGS
recognition event and creates a COGS recognition transaction in Oracle Inventory that adjusts
the ratio of earned and deferred COGS to match that of earned and deferred revenue. You must
run this process after completion of the Collect Revenue Recognition Information concurrent
process.
Note: This concurrent request has no parameters.

Agenda

Supported Business Scenarios
Supported Business Scenarios

Revenue / COGS matching is supported for the following sales order business scenarios:
• Sales orders: no customer acceptance
• Sales orders: customer acceptance enabled
• Sales orders: configured items - Assemble To Order (ATO) / Pick To Order (PTO)
Sales Orders: No Customer Acceptance

The following scenarios represent Revenue / COGS matching for sales orders where customer
acceptance is not in the business process flow. The underlying assumption in this set of
scenarios is that ownership is transferred at the time of shipment. They apply when customer
acceptance is not enabled in Oracle Order Management. Scenarios include:
• Sales order/invoicing, RMA, and credit memo
• Alternate revenue allocation in credit memo
• Credit memo before RMA
• RMA following full revenue recognition
• Sales order, multiple RMA's, revenue recognition, credit memos

• RMA not tied to sales order
• Uninvoiced sales order
Sales Orders: Customer Acceptance Enabled

The following scenarios represent Revenue / COGS Matching for sales orders where customer
acceptance is in the business process flow. The underlying assumption in this set of scenarios
is that ownership is transferred at the time of shipment. They apply when customer acceptance
is not enabled in Oracle Order Management. Scenarios include:
• Sales order, acceptance, invoicing, revenue recognition, RMA, credit memo
• Sales order, RMA replacement, acceptance, invoicing, pre-invoicing acceptance
• Sales order, invoicing, RMA receipt with credit, rejection, RMA no receipt with credit,
post-invoicing acceptance
• Sales order, rejection
• Uninvoiced sales order
Sales Orders: Configured Items – PTO / ATO

Oracle Cost Management supports the allocation of item cost between earned and deferred
COGS for Assemble to Order (ATO) and Pick to Order (PTO) items. Revenue/COGS
synchronization for configured items is achieved by matching a shipped, costed line to the
invoiceable line that it most closely relates to. If the shipped line is invoiced, then the revenue
recognition schedule for that line drives COGS recognition. If the shipped line is not invoiced,
then COGS for that line will be driven by the revenue recognition for the nearest invoiced line
that it rolls up to.
You can synchronize revenue/COGS for the following types of configured items:
• Kit (PTO without options)
• ATO model
• PTO model
• PTO model with imbedded ATO model

Summary


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Copyright © 1996, 2007, Oracle. All rights reserved.