Billing a sales order and recognizing the revenue from that sale can happen at different times and at different foreign currency exchange rates if multiple currencies are involved. If foreign currency rates differ at the time of billing and revenue recognition, an adjustment is required at the end of each financial period to align the revenue recognition exchange rate with the effective billing exchange rate.
Creating Revenue Reclassification Journal Entries helps in resolving this foreign currency deferred revenue discrepancy and also it helps in Unbilled receivables adjustment.
Deferred revenue reclassification for revenue commitments is calculated at the line item level. Line level deferred revenue reclassification uses item-specific revenue and deferred revenue accounts to post deferred revenue amounts per transaction line.
When we run the revenue reclassification process, it will create journal entries that will perform;
- Line Level Foreign Currency Adjustment : The foreign currency gain/loss amount is calculated based on the billing and revenue recognition rates for each line and summed up to an order level foreign currency gain/loss balance. The gain/loss adjustment posts an adjustment to the revenue and deferred revenue accounts associated with each line.
The G/L impact for the foreign currency adjustment to revenue is:
For a gain: Debit Deferred Revenue and Credit Revenue.
For a loss: Debit Revenue and Credit Deferred Revenue.
2. Order Level Unbilled Receivable Adjustment : The unbilled receivable adjustment is calculated at the order level by comparing the accumulated base currency billing amount to the accumulated base currency revenue recognition amount. If the sales order is being created in a foreign currency, the unbilled receivables adjustment amount is then converted to foreign currency using the daily rate in effect at the time the first adjustment is calculated.
The G/L impact for reclassifying revenue is:
When billing < revenue recognition: Debit Unbilled Receivable and Credit Deferred Revenue.
When billing > revenue recognition: Debit Deferred Revenue and Credit Unbilled Receivable. Reclassification is not needed unless unbilled receivables exist from a prior period, so a journal entry may not be created.
To create deferred revenue reclassification journal entries:
- Go to Transactions > Financial > Create Reclassification Journal Entries.
- In Posting Period, select the period to reclassify revenue for.
- For Journal Entry Date, enter the date for the journal entries.
- Select the Subsidiary.
- In the Select Individual Schedules field:
Check the Select Individual Schedules box to create only one journal entry for the transactions you select from the list of source transactions. - Click Create Journal Entries.