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Use of revenue allocation groups in fair value calculations

NetSuite’s Advanced Revenue Management (ARM) module provides users the ability to perform revenue recognition for multiple-element arrangement transactions based on system defined fair value calculations. The fair value calculations leveraged by NetSuite can be simple, such as leveraging the “discounted sales amount” of each item on the transaction, or more complex where the formulas can be established to perform the calculations. One of the more robust fair value calculation concepts available in NetSuite’s Advanced Revenue Management (ARM) module is called “Revenue Allocation Groups”. Revenue Allocation Groups allow NetSuite’s fair value calculation engine to reference a “group” of items on a transaction and then derive calculations based on the attributes of that group. Please see below for an example of the use of Revenue Allocation Groups and a guide on how to configure Revenue Allocation Groups.

Example

A sales order transaction has 3 items:

  • Server (Enterprise) $8,000.00
  • Installation (Enterprise) $2,000.00
  • Maintenance Contract $3,125.00

Total = $13,125.00

For our example – we need to determine the fair value of the maintenance contract required to be allocated. Based on this organizations practices, the fair value of the maintenance contract should be based on 25% of the “Enterprise” related items. In this case, the items can be tagged as “Enterprise” items using the Revenue Allocation Groups. Now let us overview how this can be achieved, below.

Configuration Overview:

  • Created Revenue Allocation Groups
  • Link the Revenue Allocation Group to desired item records.
  • Incorporate the Revenue Allocation Group into the desired fair value formula using the “GroupSum()” function.

To Create Revenue Allocation Groups in NetSuite navigate to:

  • Setup>Accounting>Accounting List> New (Admin role) or
  • Revenue>Setup>Revenue Allocation groups>new (Revenue Manager Role)

Here the user will be able to create a Revenue Allocation Group by simply adding a name – such as “Enterprise”.

Link the Revenue Allocation Group to desired item records

 

  • Navigate to the item record/s of choice and link the related revenue allocation group to the item via the “Revenue Allocation Group” field under the Revenue Recognition/Amortization subtab.

  • We would assign the enterprise allocation group to the Server and Installation items, noted above.

 

Incorporate the Revenue Allocation Group into the desired fair value formula using the “GroupSum()” function

  • The GroupSum function must be used in the fair value formula in a specific manner as follows: GroupSum(revenueallocationgroup, expression) or in our example: GroupSum((Enterprise, {amount})*0.25)

  • This formula would then effectively assess the items on the sales contract, searching for items with the listed Revenue Allocation Group. Then pulled the desired information for those specific items into the expression (i.e. formula).
  • The result being GroupSum((Enterprise, {$8,000 +$2,000})*0.25) = $2,500.
  • Therefore, with this formula the maintenance contract would be allocated $2,500 worth of revenue and not the $3,125 sales price on the sales transaction.

 

Note: the fair value formula can then be linked the item revenue category that is linked to the item record via the “Item Revenue Category” field or this can be set on the fair value price list.

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