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About recognition methods for deferred revenues or expenses
Introduction
Recognition methods determine how the deferred revenue or expense amount of a particular
document will be distributed over the defined number of periods.
You specify a particular
recognition method in the settings of each deferral code in the Deferral codes (DR202000) window.
You can assign a deferral code to a line of an invoice.
Evenly by periods
With the Evenly by periods recognition method, the amount to be recognised is
distributed evenly to all included periods.
The number of recognition periods is defined by the
value you specify in the Occurrences field for the deferral code in the Deferral codes (DR202000) window.
An occurrence is a recognition event for which a recognition transaction is generated.
The
frequency of recognition events depends on the number (of financial periods) that you select in
the Every X periods field.
(For example, a 2 in this field would mean
that a recognition event occurs every 2 financial periods.)
Thus, when you select the Evenly
by periods recognition method, you also need to define the number of recognition
occurrences for the document amount and their frequency.
The number of occurrences does not include immediate recognition of the revenue or expenses, which is based on the percentage specified in the Recognise now (%) field.
Example
Suppose there is an invoice dated January 11, 2021, that contains one line with an amount of
€1500.
The sales revenue should be recognised over six months in equal recognition amounts. (In
this example, periods are defined as months in the system.)
You apply a deferral code that has
the following settings in the Deferral codes (DR202000) window:
- Recognition method: Evenly by periods
- Occurrences: 6
- Schedule settings: Every 1 period(s)
With this recognition method, the document amount (€1500) is divided evenly among six periods: January, February, March, April, May, and June; each portion is equal to €250.
In this example, the recognition period is equal to the financial period because we set the
recognition schedule to Every 1 period(s).
If we had set it to Every 2 period(s),
the recognition period would be equal to two financial periods, which means that the recognition
process would be performed once every two months.
Evenly by periods, prorate by days
With the Evenly by periods, prorate by days method, the amount to be recognised is distributed evenly among recognition periods (the number of which is defined by the value specified in the Occurrences field in the Deferral codes (DR202000) window). The first and last periods are counted together as one recognition period and the amount to be recognised for each is proportional to the number of days in each period.
Again, an occurrence is a recognition event. The frequency of occurrences depends on the
number (of financial periods) you select in the Every X period(s) field.
The instalment amounts for the first and last periods are calculated based on a full-period
amount that is proportional to the number of days each instalment should cover.
Example
Suppose there is an invoice, dated 1.11.2021, that contains one line with an amount of
€1500. The sales revenue should be recognised over six months.
(In this example, periods are
defined as months in the system.) You apply a deferral code that has the following settings in
the Deferral codes (DR202000) window:
- Recognition method: Evenly by periods, prorate by days
- Occurrences: 6
- Schedule settings: Every 1 period(s)
With this recognition method, the document amount is divided evenly among five full periods, with each portion equal to €300.
Four of these periods are February, March, April, and May.
The fifth €300 portion is divided into two parts, each of which is proportional to the number of days included in the recognition time interval in January (20 days, so €193.55) and in June (11 days, so €106.45).
The amounts are rounded according to the base currency precision, which is set to 2.
Evenly by days in period
With the Evenly by days in period method, the amount to be recognised is distributed by
periods with a proportional division by the number of calendar days in each period.
The number
of recognition periods is defined by the value specified in the
Occurrences field in the deferral code settings in the Deferral codes (DR202000) window.
As mentioned, an occurrence is a recurring recognition event for which a recognition
transaction is generated.
The frequency of occurrences depends on the number (of financial
periods) you select in the Every X period(s) field.
Example
The sales revenue should be recognised over six months.
(In this example, periods are defined as months in the system.) You apply a deferral code that has the following settings in the Deferral codes (DR202000) window:
- Recognition method: Evenly by days in period
- Occurrences: 6
- Schedule settings: Every 1 period(s)
With this recognition method, the amount for each recognition period is computed based on the number of calendar days in each period:
- January (31 days): The amount to be recognised is €256.91.
- February (28 days): The amount to be recognised is €232.04.
- March (31 days): The amount to be recognised is also €256.91.
- April (30 days): The amount to be recognised is €248.62.
- May (31 days): The amount to be recognised is €256.91.
- June (30 days): The amount to be recognised is €248.61.
Flexible by periods, prorate by days
With the Flexible by periods, prorate by days method, the amount to be recognised is distributed evenly among periods, with a proportional division by days among the first and last periods. The first and the last periods may be less than a full period, depending on the start recognition date and the final recognition date specified in a particular document (such as purchase invoice). The number of recognition periods is defined by the recognition dates specified in a document.
Example
Suppose there is an invoice that contains one line with an amount of €1500.
In this invoice,
the start date of the recognition process (in the Term start date field in
the Sales invoices (AR301000) window) is set to 15.2.2021, and the
final date of the recognition process (in the Term end date field) is set
to 21.6.2021.
Thus, the document amount should be recognised within the date range defined
by the term start date and the term end date.
A deferral code with the following settings in the Deferral codes (DR202000) window is applied to this invoice:
- Recognition method: Flexible by periods, prorate by days
- Schedule settings: Every 1 period(s)
With this recognition method, the document amount is distributed over the date range that starts on the 15.2. (term start date) and ends on the 21.6. (Term end date). The date range covers 14 days of February, three full periods (March, April and May), and 21 days of June.
The 14 days of February is 0.5 period (14 days / 28 days = 0.5). The 21 days of June is 0.7
period (21 days / 30 days = 0.7). Thus, February and June together makes 1.2 periods.
So that,
the revenue amount should be distributed across 4.2 periods, which is 3 periods of March, April
and May + 1.2 periods of February and June.
The amount recognised in each of the three full periods (March, April, and May) is €1500 / 4.2
= €357.14.
The amount recognised in February is 0.5 * €357.14 = €178.57, and the amount
recognised in June is 0.7 * €357.14 = €250.01.
Flexible by days in period
With the Flexible by days in period method, the amount to be recognised is distributed
among periods, according to the number of calendar days in each particular period.
The start
date and the final date of the recognition process is specified individually for each line of a
particular supplier ledger document (such as purchase invoice or cash sale).
Example
Suppose there is an invoice that contains one line with an amount of €1500. In this invoice,
the start date of the recognition process (in the Term start date field in
the Sales invoices (AR301000) window) is set to 15.2.2021, and the final date of the
recognition process (in the Term end date field) is set to 21.6.2021.
Thus, the document amount should be recognised within the specified date range, which is equal
to 127 days (the number of days between the term start date and the
term end date.
A deferral code that has the following settings in the Deferral codes (DR202000) window is applied to the invoice:
- Recognition method: Flexible by days in period
- Schedule settings: Every 1 period(s)
With this recognition method, the document amount is spread over the 127 days, with a proportional division by days. Thus, the document amounts are allocated as follows:
- February (14 days): The amount is €165.35.
- March (31 days): The amount is €366.14.
- April (30 days): The amount is €354.33.
- May (31 days): The amount is €366.14.
- June (21 days): The amount is €248.04.
On payment
Before payment arrives, the recognition is planned evenly over the specified number of periods.
Once a payment has been applied to the appropriate line of the original document, recognition is performed in the amount of the payment that is proportional to the line amount (if there are multiple lines). The recognition of the unpaid amount will be projected in portions that are calculated proportionally to the number of remaining period, while the actual recognition of the next portion will be performed when the next payment arrives.
This method can be applied to the revenue recognition only.
When you select the On payment method in the Recognition method field, then the Revenue option is selected by default in the Code type field and is not available for editing.
