Collectibility Doubt, Revenue Still Recognized
Aurora Cloud Solutions contracts with Brightline Logistics in the Aurora US business unit for a 36-month subscription plus implementation. The subscription is 360,000 USD (10,000 USD per month) billed annually in advance; implementation is 90,000 USD billed on milestone. Aurora raises INV-2201 for 120,000 USD (year-one subscription) and INV-2202 for 90,000 USD (implementation). Three months in, Brightline is 95 days late on both invoices and its credit rating has been downgraded; Aurora concludes that collectibility is not probable. Aurora's ledger currently shows the full 210,000 USD as revenue, because the transaction type's accounting rule recognizes revenue at invoicing and no revenue schedule exists on either line. After year one, Aurora also agrees a 30,000 USD price concession for the following year.
1. Given that collectibility is not probable, how should the 210,000 USD be treated, and what must change in the Receivables configuration so that revenue is not recognized at invoicing?
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Accounting conclusion. A contract exists under the revenue standard only if collectibility is probable. Here it is not, so the arrangement fails the first criterion: amounts billed are not revenue but a liability (deferred or customer deposit) recognized as cash is received, and the 210,000 USD already recognized must be reversed out of revenue.
Configuration cause. Revenue was recognized at invoicing for two compounding reasons: the transaction type's accounting rule posts the revenue accounting line at invoice creation, and neither line carries a revenue schedule, so there is no mechanism to defer and release. To fix going forward:
- Attach a revenue schedule to the subscription line (billed in advance, released over the service period) and to the implementation milestone.
- Use a transaction type whose accounting rule creates the unearned revenue accounting line at invoicing and passes revenue through the revenue recognition process rather than at invoice.
- Mark the arrangement contingent so revenue is recognized only as cash is collected, and release the contingency as payments arrive.
Correction. Do not edit posted journals. Raise revenue adjustments to move the wrongly recognized 210,000 USD into deferred or contingent revenue, run accounting on the adjustments, and document the conclusion and the trigger for reassessment (for example, two consecutive on-time payments).
2. How should the 30,000 USD year-two price concession be reflected, and what is the difference between the credit memo and the revenue adjustment in this situation?
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Character of the concession. A concession granted after inception is variable consideration. If it relates to services already delivered it is a cumulative catch-up; if it relates to future periods, it reduces the transaction price allocated to the remaining performance obligations and is released over the remaining service period. Only the amount that is legally enforceable should be taken off the receivable.
Two different levers:
- A credit memo of 30,000 USD reduces the amount the customer owes. It reduces AR, unwinds the related tax if any, and produces its own accounting - receivable, revenue or deferred revenue, tax. Use it when the invoiced amount itself is being cancelled or reduced.
- A revenue adjustment changes recognized revenue only, leaving the receivable intact. Use it when the customer still owes the cash but the accounting allocation must change - for example moving recognized revenue back into deferred revenue while a contingency is unresolved.
Practical sequencing. Raise the credit memo to reduce the receivable, then apply a revenue adjustment so that the deferred revenue balance reflects the reduced transaction price over the remaining term. Doing only the credit memo would dump the whole 30,000 USD against revenue at once, which overstates the current-period hit and understates deferred revenue for the remaining service.
3. The invoice posted debit receivable and credit revenue rather than credit deferred revenue. Explain why, and how to correct it without rewriting posted accounting.
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Why. Subledger accounting builds journal lines from the accounting rules attached to the transaction and its accounting events. At invoice creation the event generates the receivable line and a revenue-class line; whether that second line is 'revenue' or 'unearned revenue' depends on the accounting rule on the transaction type and on whether the line carries a revenue schedule. With no schedule and a recognize-at-invoice rule, the rule maps the full amount to the revenue account. The deferred revenue account is never touched because the subledger was never told the money is unearned.
Correction without rewriting history:
- Do not modify the posted journal. Accounting is immutable once transferred; adjusting it manually in the GL breaks the subledger-to-GL reconciliation permanently.
- Fix the cause: revenue schedules on all new bill-in-advance lines, correct transaction type and accounting rule, and confirm the rule set derives the unearned revenue account as intended.
- Correct the population already issued by generating revenue adjustments, accounting them through Create Accounting, and transferring them to the GL. These produce a visible, auditable adjustment entry rather than an unexplained manual journal.
- Reconcile the deferred revenue rollforward - opening balance, additions, releases, adjustments, closing balance - and tie it to the GL account before the period closes.