Revenue Recognition – An automated approach in D365 for Finance and Operations: Part 1 Setup

The Revenue Recognition feature in Dynamics 365 for Finance and Operations (D365FO) is available for all sales orders, including T&M project generated sales orders. It addresses the need to automatically defer/accrue revenue for a service or subscription type obligation. Deferred revenue transactions are created when an invoice is generated for items or item groups that have been configured with revenue recognition criteria, which allows for some automation to be introduced into the revenue recognition processes in D365FO.
Part 1 of this blog will define the setup steps needed for the Revenue Recognition feature. In Part 2, there will be a demonstration of one of the ways revenue can be deferred and periodically realized.

1. The feature is activated using the module’s “License key.”
2. It provides a flexible framework for defining company-specific rules for:
   • Revenue price – Price to be recognized or sales price.
3. For any sales order line that has a revenue schedule, the expected revenue schedule and price is created when the sales order is confirmed and deleted/replaced with the actual revenue schedule when invoiced.
4. It utilizes Released product or Item group to support the revenue price and/or schedule.
5. If revenue price is not defined, the sales order price will be used for deferred revenue allocations.
6. If the revenue schedule is not defined, line amounts will be posted to the revenue account when invoiced.

Configure Revenue Recognition Feature

Define Number sequences

A single voucher number can be created to use on all Revenue recognition journals. However, for traceability purposes, it is recommended that separate number sequences are created.

1. Revenue recognition voucher number
   • Reference should be left blank
2. Revenue recognition adjustment voucher number
   • Reference should be left blank
3. Revenue reallocation voucher number
   • Use pre-defined GL reference Revenue reallocation ID from drop-down list.

Create Revenue recognition journals names

1. Revenue recognition journal
   • Journal type should be Revenue Recognition.
   • Set Voucher series to the previously created number sequence Revenue Recognition voucher number.
2. Revenue recognition adjustment journal
   • Journal type should be Revenue Recognition
   • Set Voucher series to the previously created number sequence Revenue recognition adjustment voucher #

Update General Ledger Parameter settings for Revenue recognition tab

1. Revenue recognition journal name field – Select the journal name created previously for Revenue recognition journal.
2. Enable discount allocation method field.
   • Yes – revenue price (simplest choice)
   • No – median price
3. Include header discounts field.
   • Yes – Revenue price includes allocated header discounts.
   • No – Header discount is not included in the revenue price.
4. Disable contract terms field.
   • Yes – Products with revenue type of Post contract support (“PCS”) can be released even though contract start and end dates aren’t defined for them. The revenue schedule is calculated using the invoice date.
   • No – Contract start and end dates must be defined on the contract. This prevents incorrect date assignment.
5. Post invoice corrections to Accounts receivable when reallocating field.
   • No – Limit the posting of correcting transaction to General ledger and no additional documents are created in Accounts receivable.
   • Yes – Automatically create a reversing document and new invoice for the correcting transaction in Accounts receivable

Create default Revenue schedules

For each scenario that can result in deferred revenue, a default revenue schedule should be created (ex. 6 month, 24 months, etc). The revenue schedule will be used to determine the default dates for the revenue schedule that is created when the invoice is posted and the number of “occurrences” that revenue should be deferred.

1. Occurrences– Number of months or occurrences for the revenue deferral.
2. Automatic hold– Automatically place lines on hold when the invoice is posted.
3. Automatic contract terms–Contract start and end dates should automatically be set
4. Recognition basis– determines how the revenue price will be allocated.
   • Monthly by dates–amount is allocated based on the actual number of days in each month.
   • Monthly – amount is allocated equally across the number of months defined in the occurrences.
   • Occurrences–amount is allocated equally across the occurrences.
5. Recognition convention– determines the default dates that are defined on the revenue schedule for the invoice.
   • Actual start date– uses either the contract start date for PCS items or the invoice date for essential and nonessential items.
   • 1st of month– uses the contract start date (or invoice date), however, all subsequent schedule lines will be created for the first of the month.
   • Mid-month split– depends on the invoice date.
     • If invoice post date = first through fifteenth, the revenue schedule is created by using the first day of the current
     • If invoice post date = sixteenth or later, the revenue schedule is created by using the first day of the next
   • 1st of next month– uses the first day of the next month to begin schedule.
6. Revenue schedule details (located in the menu tab)– view the general periods and the percentages that are recognized in each period.
   • Period – Accrual period number
   • Recognize percentage– by default, the value is equally divided across the number of periods.
   • Recognition percentage can be modified, however, the total percentage must equal 100 before closing the page.

Setup Inventory

1. Item group
   NOTE: The default values are applied only to newly created released products with the item group.
2. Sales order tab
   • Enter the ledger account for Deferred Revenue
   • Enter the ledger account for Cost of Goods Sold
3. Revenue recognition tab
   • Enter a default revenue schedule
   • Enter the revenue type
     • Essential
     • Non-essential
     • Post contract support (PCS)
   • Set Median price toggle (available only if the Is revenue allocation active toggle was set to Yes)

Update Released products

Revenue recognition will occur when a released product that is defined for revenue recognition exists on the sales order.
The selections that are made when the released products are set up determine the default values for how the item’s revenue will be recognized.
Updating the default values on existing released products can be completed on the Revenue recognition > Setup > Inventory and product setup > Released products page.

1. 1. General tab
      Item model group field: The item model group selected must not have the “Post to Deferred Revenue Account on Sales Delivery” box checked (does not function with Revenue Recognition feature)
   2. Sell tab
      • Base Sales Price field: The default price that will be used when Median Price is not defined.
   3. Manage costs tab
      • Item group field – Enter the item group defined previously (deferred account values were defined)
      • Price field – Enter the default cost of goods sold value
   4. Revenue recognition tab
      • Revenue schedule field – Select a default revenue schedule that represents the deferral term.
      • The revenue price allocation method – item groups and released products can be set up by using either the median price method or the discount allocation method.
        • Is revenue allocation active field
          • Yes– include the product in the revenue allocation calculation.
          • No – the product uses the median price method (if available), otherwise, the unit price on the sales order.
        • Revenue type field
          • Essential– The item is a primary source of revenue.
          • Nonessential– The item is not a primary source of revenue.
          • Post contract support– The item supports the other line(s) that are included on the sale order. The PCS revenue price can be distributed across essential and nonessential products on the sale.
        • Exclude from carve out field
          • Yes – median price cannot be adjusted below the minimum percentage that is defined or above the maximum percentage.
          • No – median price can be adjusted or carved out (at least one product on sales order must be “No“)
        • Median price field
          • Yes — the item’s revenue price should be adjusted so that it equals the median price if it is below the minimum tolerance or above the maximum tolerance.
            • Maximum tolerance– The percentage over the median price that is permitted.
            • Minimum tolerance– The percentage under the median price that is permitted.
          • No – price should not be adjusted.
   5. Sell Action Pane (optional)
      • Setup basis (under Revenue recognition section)– define each item group that item (if PCS) is supporting.

Setup Revenue price (optional)

Define the revenue price(s) (if using median price method).

1. Criteria for setting up prices (by item or customer)
   • Item code and Item relation 
   • Customer Account code and Account/Group number 
   • Currency– Additional revenue prices are required for each currency that a customer, order, or invoice will use.
   • Amount or percent of list
     • Revenue allocation price– amount or a percentage (based on Amount or percent of list selection)
     • From dateand To date (optional) –Date range that the revenue price is active for.

Update Posting profile (deferred revenue & cost defaults)

1. Sales order tab
   • Deferred revenue – Main account to post deferred revenue (instead of revenue). The revenue price is deferred if the sales order line has a revenue schedule.
   • Deferred cost of goods sold – Main account to post deferred cost of goods sold if the revenue is deferred.
   • Partial invoice revenue clearing– Main account of clearing account to post when the sales order is partially invoiced or when reallocation occurs. The balance in this account returns to 0 (zero) when the sales orders are fully invoiced.
2. Project posting setup
   Revenue recognition can also be processed for sales orders or item requirements that are created from a Time and materials project.
   • Deferred invoice revenue (under Revenue accounts) – Main account to post deferred revenue
   • Deferred cost (under Cost accounts) – Main account to post deferred cost of goods sold if the revenue is deferred.

With minimal setup, deferred revenue can automatically be calculated, processed, and periodically posted for the life of the invoice line’s recognition schedule.