Project Partners’ blog series examines the impacts of the ASC 606 revenue recognition standards and how using Oracle E-Business Suite (EBS) Projects can facilitate compliance with the new standards. We discuss the fourth step to revenue recognition under the new standard: Allocate the Transaction Price.

Part of our ASC 606 New Revenue Recognition Standards blog series. Previous posts include: Introduction to Achieving ASC 606 Compliance, Step 1: Identify the Contract with the Customer, Step 2: Identify Performance Obligations in the Contract, Step 3: Determine the Transaction Price – Revenue Recognition Standards.

Step 4: Allocate the Transaction Price comes into play when a contract contains more than one performance obligation.  The seller should allocate the selling price to each performance obligation based on its relative Standalone Selling Price (“SSP”).  The Standard permits any method of allocation of the SSP as long as the estimation accurately represents what price would be charged in separate transactions.

ASC 606 does mention three acceptable methods of allocation, discussed in their section on SSP.  These methods include adjustment market assessment, expected cost plus margin, and residual.

Allocating Variable Consideration and Volume Discounts
If the contract includes any variable consideration or discounts, and there are multiple performance obligations in the contract, the consideration should only be allocated to the performance obligation to which it is related.

Using Oracle EBS Projects to Meet the Objectives of Step 4 of the ASC 606 Revenue Recognition Standards

Again, let’s review the three types of contracts typical to service delivery organizations:

• Service Contracts based on selling hours (Time & Expense-“T&E”): In this scenario, the delivery organization contracts to provide a specified number of hours of specialized resources to meet the client’s requirements. There are no specific deliverables listed in the contract. These contracts are slowly disappearing as clients demand more specifics before signing contracts.
  • Pure Professional Service Organizations (“PSO”) – Management Consulting
• Time & Material (“T&M”) Service Contracts based on specific Deliverables AND Fixed Price Service Contracts based on Milestones: These are very typical service contracts. They are combined here even though they have completely different billing methods because they will need to be treated the same for revenue recognition purposes under the new standard. Additional contract types, such as Cost Plus or some variant of this with different fees, will also fall under this category for Revenue Recognition as long as these contracts specify obligations or deliverables on the service provider.
  • PSOs, Engineering, IT Services, Marketing/Advt. Services
• Unit Price-Based Contracts: Commonly referred to as Schedule of Values (SOV) contracts. These contracts typically specify the number of units to be delivered for one or more types of items after an initial design/confirmation period.
  • Construction, ATO/ETO-based Manufacturing Firms.
  • The schedule of Values functionality is delivered in release 12.2.5.

Now, we’ll use Oracle E-Business Suite (EBS) Projects to complete Step 4 and allocate the transaction price across obligations for each of the three service contracts discussed.

Allocate the total contract price across obligations and set up in Projects as follows:

Service Contracts based on selling hours (T&E)

Set up Hourly Bill Rates and assign them to Project.

T&M Service Contracts based on specific Deliverables and Fixed Price Service Contracts based on Milestones

Set up a Billing Action for each Deliverable and assign a Billing Event type for revenue recognition and allocated price.

Unit Price-Based Contracts

For each SOV line, set up a unit price and total line amount based on allocated values.

You will also need to assign each SOV line to a task on your work plan and publish it.

Oracle EBS Projects can be used to help you meet the ASC 606 requirements and achieve revenue recognition compliance. Our New Revenue Recognition Standards blog series demonstrates how project-centric companies can use Oracle EBS Projects to manage and comply with the new standards with minimum disruption to existing business practices.

In the next blog, we will review an operational step in Step 5: Recognize Revenue as Performance Obligation is Satisfied – Part 1: Deliver Services and Record Outcomes.

Learn more on managing ASC 606 revenue recognition with Oracle E-Business Suite (EBS) Projects –
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