Example: Percent Net Revenue Reallocation in RevRec
This article will explain "Percent Based" revenue allocation in accordance with a company's 606 policy. In the example, the company sells a single perpetual license that in accordance with policy requires 75% of the revenue to be allocated to the software and the remaining 25% to support it.
In order to make this happen we introduce two performance obligations (one for the license and the other for support) and allocate the revenue between them using the 'percent net' method and then recognize the license as a 'point in time' on the sale date whereas support is recognized ratably over a 12-month term.
To represent the percent net revenue reallocation, for accounting purposes we have created a Revenue License for 75% and Revenue Support for 25% and also a Perpetual License in zero dollar amount as referred by the screenshot below.
1. First, we have created a sales order for Perpetual licenses with 1 quantity and a unit price of $10,000. We leave the Delivery date as Order Date as the Revenue rule is set as POINT_IN_TIME.
2. Revenue license at $0 unit price, quantity 1, and delivery date as Order date.
3. Revenue support at $0 unit price, quantity 1, and delivery date as Order date.
Now we have created all three products.
Under Revenue Arrangement, you can view the data and graph, where the Perpetual license will be at $0 as configured, then the Revenue license will show 75% of revenue for the first month as it has been configured on point in time revenue and the Revenue support will show less on the first & last month due to proration (midmonth) however for the consecutive months the revenue will be displayed by 25% for this item as it has been configured as ratable as referred on the screenshot below.
For the Advance percent of net revenue allocation, you can add two or more products under Related product Type on the SSP rule for RevRec to calculate the percent on the combination of the products listed on the same rule.
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