Standard calculation for straight line revenue recognition
Original contract value = 12000
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| Original contract value |
Actual start date = 1st July 2018
Actual end date = 30th June 2019
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| Start and End dates |
Estimation for first three periods (months)
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| Estimation for first 3 months |
Calculation for Accrued revenue is as follows:
Accrued revenue = (Total contract value / Number of days in the entire period) * (Number of days in the month in consideration)
July 2018 had 31 days, hence the accrued revenue for the month of July is as follows: (12000 / 365) * 31 = 1019.18
Similarly for the months of August and September, the accrued revenue is 1019.18 and 986.30 respectively.
Contract value changes
Contract value increased mid-way
However if the contract value is changed now and is updated to 16000, what will be the impact on the revenue recognition for the month of October. Lets see:
Updated contract value = 16000
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| Updated contract value |
Estimation for month of October
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| Estimation for October |
The accrued revenue value for the month of October is 2367.12. How did the system calculation logic arrive at this value?? It is as follows:
Accrued revenue for original contract value for October = (12000 / 365) * 31 = 1019.18
Accrued revenue for updated portion of contract value upto October = (4000 / 365) * 123 = 1347.95
Total of 1019.18 + 1347.94 = 2367.12
** 123 is the number of days from July to October; 31+31+30+31 = 123 **
From the next estimate, the calculation will be as follows:
Estimation for month of November
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| Estimation for November |
Accrued revenue for increased contract value for November = (16000 / 365) * 30 = 1315.07
From November onwards the entire contract value (original + updated) will be considered in the calculation.
Contract value decreased mid-way
However for some reason if the un-billed contract value is reduced, then the revenue recognition engine is smart enough to adjust the change and post -ve accrued revenue for the next period.
Contract value reduced to 12000 again.
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| Contract value reduced |
Estimation for month of December
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| Accrued revenue value adjusted as per the changed contract value |
The accrued revenue value is now -657.53.
This is calculated as follows:
Accrued revenue for original contract value for December = (16000 / 365) * 31 = 1358.90
Accrued revenue for updated portion of contract value upto December = (4000 / 365) * 184 = 2016.43
Total of 1358.90 - 2016.43 = - 657.53
** 184 is the number of days from July to December; 31+31+30+31+30+31 = 184 **
From the next estimate, the calculation will be as follows:
Estimation for month of January
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| Estimation for January 2019 |
Accrued revenue for decreased contract value for January = (12000 / 365) * 31 = 1019.17
From January onwards the entire updated contract value will be considered in the calculation.
Contract length changes
Original dates are as follows:
Actual start date = 1st July 2018
Actual end date = 30th June 2019
First three estimate values are as follows:
 |
| Estimates for first 3 months. |
Contract length increased mid-way
Contract length is increased after the first three estimates.
Updated dates are as follows:
Actual start date = 1st July 2018
Actual end date = 30th September 2019
Estimation for month of October
Accrued revenue for original contract length for October = (12000 / 365) * 31 = 1019.18
Accrued revenue for updated portion of contract length upto October = (12000 / 457) * 31 = 814.08
Total of 1019.18 - 814.08 = 205.10
Estimation for month of October
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| Estimate for October after contract length increase |
Accrued revenue for original contract length for October = (12000 / 365) * 31 = 1019.18
Accrued revenue for updated portion of contract length upto October = (12000 / 457) * 31 = 814.08
Total of 1019.18 - 814.08 = 205.10
** 457 is the number of days calculated as follows : 365 + 31+31+30. Additional days for the months of July, August and September **
From the next estimate, the calculation will be as follows:
Estimation for month of November
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| Estimation for November |
Accrued revenue for November with new contract length = (12000 / 457) * 30 = 787.75
From November onwards the entire contract length (original + updated) will be considered in the calculation.
Contract length decreased mid-way
Contract length is decreased after the first three estimates.
Updated dates are as follows:
Actual start date = 1st July 2018
Actual end date = 31st March 2019
Estimation for month of October
Estimation for month of October
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| Estimate for October after contract length decrease |
Accrued revenue for original contract length for October = (12000 / 365) * 31 = 1019.18
Accrued revenue for updated portion of contract length upto October = (12000 / 277 ) * 31 = 1343.96
Total of 1019.18 + 1343.96 = 2362.20
Accrued revenue for updated portion of contract length upto October = (12000 / 277 ) * 31 = 1343.96
Total of 1019.18 + 1343.96 = 2362.20
** 274 is the number of days calculated as follows : 365 - (30+31+30). Additional days for the months of April, May and June. Ideally it should be 274 but not sure why system took 277. Will update once i find the issue **
From the next estimate, the calculation will be as follows:
Estimation for month of November
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| Estimation for November |
Accrued revenue for November with new decreased contract length = (12000 / 274 ) * 30 = 1313.86
From November onwards the entire contract length (original + updated) will be considered in the calculation.
This is all about the calculation logic in straight line revenue recognition when the either the contract value changes or the contract length changes in between.
Thanks
Sarang
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