RevRec automatically generates revenue recognition schedules based on the service start and end dates. The Ratable method of revenue recognition is commonly used for SaaS-based product offerings. Another common use case is post-contract customer support, where the contract period is generally a year from the initial contract. This article displays the calculations that RevRec uses to establish monthly amounts.
RevRec defines a range of dates using the Half-Open approach (start <= x < end) where the service start date is inclusive while the service end date is exclusive.
You can choose from the following four Ratable methods of revenue recognition for your business:
We will look into each of these methods in detail.
When this method is used, RevRec generates Ratable plans using a simplifying assumption that each year is a 360-day year with twelve 30-day months. Considering each month to be a 30-day period, RevRec first calculates the revenue per day by dividing the Total Revenue by 360 days as per the 30/360 logic to arrive at the revenue per day.
(1) First Period
The first month's revenue recognition number is prorated based on the number of days remaining in the first month. If the first month has 30 or more days, it is considered a full month. In such a case, the full month's revenue is recognized for the first month.
(2) Last Period
The last month's revenue recognition number is prorated based on the number of days remaining in the last month. If the last month has 30 or more days, it is considered a full month. In such a case, the full month's revenue is recognized for the last month.
(3) Remaining Periods
Revenue for the remaining period, which is the period between the first and last month is calculated by dividing the remaining revenue by the number of remaining periods.
Here is an example to understand each scenario.
This plan is a classic method and prorates the first and last period based on the remaining days in a month. RevRec first calculates the revenue per day by dividing the Total Revenue by the total number of actual days in a contract.
(1) First Period
The first month's revenue recognition number is prorated based on the number of days remaining in the first month. If the first month has 28 or more days, it is considered a full month. In such a case, the full month's revenue is recognized for the first month.
(2) Last Period
The last month's revenue recognition number is prorated based on the number of days remaining in the last month. If the last month has 28 or more days, it is considered a full month. In such a case, the full month's revenue is recognized for the last month.
(3) Remaining Periods
Revenue for the remaining period which is the period between the first and last month is calculated by dividing the remaining revenue by the number of remaining periods.
Here is an example to understand each scenario.
In this method, RevRec does not calculates the first month, or last month's revenue and divides the remaining contract value with the remaining terms. Instead, it divides the total contract value by the actual number of days in a contract and multiplies it with the number of days active in each month.
In this method, RevRec generates Ratable plans that include a full month's revenue in the first month and none in the expiration month, even if the contract started mid-month. The full month's revenue is calculated for all months in between as well.
Consider an annual contract of $1,200 that starts on 3/21/20 and ends on 3/21/21, wherein the total number of days in a year is considered to be 360.
| Period | Month | Revenue | Calculation |
|---|---|---|---|
| First Period | March, 2020 | $33.33 | First Period Revenue = First Period Percent X Revenue First Period Percent = First Period Days/Total Number of Days(10/360*100) = 2.78% |
| Remaining Periods | April, 2020 | $100 | Remaining Periods' Monthly Revenue = Remaining amount/Remaining duration Remaining amount = Total Revenue - (First period amount+Last period amount) (1,200 - (33.33+66.66)) = $1,100 Remaing duration (13-2) = 11 months |
| May, 2020 | $100 | ||
| June, 2020 | $100 | ||
| July, 2020 | $100 | ||
| August, 2020 | $100 | ||
| September, 2020 | $100 | ||
| October, 2020 | $100 | ||
| November, 2020 | $100 | ||
| December, 2020 | $100 | ||
| January, 2021 | $100 | ||
| February, 2021 | $100 | ||
| Last Period | March, 2021 | $66.66 | Last Period Revenue = Last Period Percent X Revenue Last Period Percent = Last Period Days/Total Number of Days(20/360*100) = 5.56% |
| Total | 12 months | $ 1,200 |
Consider an annual contract of $1,200 that starts on 3/21/20 and ends on 3/21/21, wherein the total number of days in a year is considered to be 365(or 366 for a leap year).
| Period | Month | Revenue | Calculation |
|---|---|---|---|
| First Period | March, 2020 | $36.16 | First Period Revenue = First Period Percent X Revenue First Period Percent = First Period Days/Total Number of Days(11/365*100) = 3.01% |
| Remaining Periods | April, 2020 | $99.83 | Remaining Periods' Monthly Revenue = Remaining amount/Remaining duration Remaining amount = Total Revenue - (First period amount+Last period amount) 1200 - (36.16+65.75)) = $1098.08 Remaing duration (13-2) = 11 months |
| May, 2020 | $99.83 | ||
| June, 2020 | $99.83 | ||
| July, 2020 | $99.83 | ||
| August, 2020 | $99.83 | ||
| September, 2020 | $99.83 | ||
| October, 2020 | $99.83 | ||
| November, 2020 | $99.83 | ||
| December, 2020 | $99.83 | ||
| January, 2021 | $99.83 | ||
| February, 2021 | $99.83 | ||
| Last Period | March, 2021 | $65.75 | Last Period Revenue = Last Period Percent X Revenue Last Period Percent = Last Period Days/Total Number of Days(20/365*100) = 5.48% |
| Total | 13 months | $ 1,200 |
Consider an annual contract of $1,200 that starts on 3/21/20 and ends on 3/21/21, wherein the total number of days in the contract is considered.
| Period | Month | Revenue | Calculation |
|---|---|---|---|
| First Period | March, 2020 | $36.16 | First Period Revenue = First Period Percent X Revenue First Period Percent = First Period Days/Total Number of Days in Contract(11/365*100) = 3.01% |
| Second Period | April, 2020 | $98.63 | Second Period Revenue = Second Period Percent X Revenue Second Period Percent = Second Period Days/Total Number of Days in Contract(30/365*100) = 8.22% |
| Third Period | May, 2020 | $101.92 | Third Period Revenue = Third Period Percent X Revenue Third Period Percent = Third Period Days/Total Number of Days in Contract(31/365*100) = 8.49% |
| Fourth Period | June, 2020 | $98.63 | Fourth Period Revenue = Fourth Period Percent X Revenue Fourth Period Percent = Fourth Period Days/Total Number of Days in Contract(30/365*100) = 8.22% |
| --- | |||
| --- | |||
| Last Period | March, 2021 | $65.76 | Last Period Revenue = Last Period Percent X Revenue Last Period Percent = Last Period Days/Total Number of Days in Contract(20/365*100) = 5.48% |
| Total | 13 months | $ 1,200 |
Consider an annual contract of $1,200 that starts on 3/21/20 and ends on 3/21/21, wherein the total number of days in a year is considered to be 365. The total number of months in the contract is taken as 12 by excluding the last month/period.
| Period | Month | Revenue | Calculation |
|---|---|---|---|
| First Period | March, 2020 | $100 | Revenue / Total number of months |
| Second Period | April, 2020 | $100 | Revenue / Total number of months |
| Third Period | May, 2020 | $100 | Revenue / Total number of months |
| Fourth Period | June, 2020 | $100 | Revenue / Total number of months |
| --- | |||
| --- | |||
| Last Period | March, 2021 | $0 | Revenue / Total number of months |
| Total | 13 months | $ 1,200 |