What are the accounting treatment for Chargebee credit notes available in RevRec?

Modified on: Tue, 1 Nov, 2022 at 4:45 PM

Scope

What are the default accounting treatments based on the credit note reasons in RevRec?

What are the advanced accounting treatments based on the credit note reasons in RevRec?


Summary


Chargebee comes with a set of credit note reason codes that users can leverage to apply credit notes for different business scenarios, such as customers' dissatisfaction over a product or service; or partial refund for the original invoice when customers choose for a plan change or a different quantity. RevRec applies a set of default recognition methods for credit note based on the reason code and further provides users the ability to adjust the treatment for certain reason codes through advanced configuration.


RevRec provides the following default accounting treatments based on the credit note reasons in Chargebee.


Use Case: 

Future Discounts

Cancel/Write-Off

Correction

Plan Change


Reason Code

Product Unsatisfactory

Service Unsatisfactory

Chargeback

Waiver

Subscription Pause


RevRec default Treatment

The credit note will be recognized prospectively over time, from the credit note creation date to the end of service date of the order/invoice that the credit note is associated with. This will offset the revenue stream associated with that order/invoice. Further, there will be no impact on already recognized revenue.


Example:

A 6-month contract is created with a total value of $600 ($100 per month). In April, a future discount of $60 is issued which makes the total contract value $540.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue100100100808080


Use Case: Cancel/Write-Off


Reason Code

Order Cancellation

Subscription Cancellation

WriteOff


RevRec default Treatment

These reason codes mark the end of the associated invoice/order.


For pro-rated refunds, RevRec will stop the revenue recognition going forward and there will be no reversal of already recognized revenue.

For a full refund, RevRec will stop the revenue recognition going forward and will reverse the cumulative recognized revenue.


Further, the reversal of revenue recognition is recognized only in the open accounting period.


For example, an order starts on January 10 and a full refund is issued on February 5th. If January is an open period, RevRec will show zero revenue for this order for both January and February. If January is closed, RevRec will show revenue for January and then a reversal of the same amount in February.


Full Refund


Example:

A 6-month contract is created with a total value of $600 ($100/month). The accounting periods for January through March are closed. In April, the user cancels the contract with a full refund. RevRec will recognize the reversal of the $300 in April and zero revenue going forward.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue100100100-30000


Prorated Refund


Example:

A 6 months contract is created with a total value of $600 ($100/month). In April, the user cancels the contract with a pro-rated refund of $300. In this case, RevRec will stop revenue recognition starting from April and no revenue is reversed.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue100100100000


Use Case: Correction


Reason Code

Fraudulent


RevRec default Treatment

The credit note is retrospectively applied - from the order's service start date to the service end date, and offset the revenue stream of the original invoice. Further, the cumulative impact will be recognized in the open accounting period.


Example:

A 6 months contract is created with a total value of $600 ($100/month). In April, a correction is made where the user issued a $60 credit note which makes the total contract value as $540.

If accountings periods for January through March are closed, RevRec will recognize the cumulative impact of the correction of $40 in April ($10/month impact from January to April) for a net revenue recognition of $60 for April, and $90 per month for May and June.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue100100100609090


If accountings periods for January through March are still open, RevRec will recognize the adjustments for each individual month and report revenue as $90 per month.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue909090909090


Use Case: Plan Change


Reason Code

Order Change

Subscription Change


RevRec default Treatment

This is the case where user changes to a different subscription plan in the midst of an existing subscription contract. The credit note is issued on a prorated basis to refund the unused portion of the original plan. RevRec will stop the revenue recognition of the original plan, and generate a new revenue schedule for the new plan going forward.


Example:

A 6 months contract is created with a total value of $600 ($100 per month). January, February and March accounting periods are closed. In April, customers upgrades from basic plan to premium plan with no extension to contract term. Premium subscription invoice amount is $1200 ($400 per month) and a credit note of $300 is issued for the pro-rated refund of the remaining periods of the original contract.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue100100100400400400


Use Case: One-Off


Reason Code

Other


RevRec default Treatment

RevRec will recognize the full credit note amount in the period of credit note creation.


Example:

A 6 months contract is created with a value of $600. In April, a one-off credit note is issued with an amount of $60.


Original InvoiceJanFebMarAprMayJun
Revenue100100100100100100


RollForwardJanFebMarAprMayJun
Revenue10010010040100100


Advanced Configuration


RevRec provides advanced configuration so that a different recognition treatment can be applied to certain credit note reason codes. Please contact your RevRec support team to enable the configurations.


Reason Code

Product Unsatisfactory

Service Unsatisfactory

Chargeback

Waiver

Subscription Pause


Configurable Treatment

Users can opt to recognize the full credit note amount in the period of credit note creation.

Or apply it retrospectively with the original contract start and end date, offsetting the revenue stream of the original contract.


Reason Code

Other


Configurable Treatment

Users can opt to apply it retrospectively with the original contract start and end date, offsetting the revenue stream of the original contract.

Or apply it prospectively from the credit note creation date till the end of the contract.


Reason Code

Fraudulent


Configurable Treatment

Users can opt to recognize the full credit note amount in the period of credit note creation.

Or apply it prospectively from the credit note creation date till the end of the contract.


Custom Credit Note reason: Chargebee allows users to create additional custom credit note reasons. RevRec's default method for these custom reason code is to recognize the full credit note amount in the period of credit note creation.

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