Technical Deep Dive: NetSuite’s new Advanced Revenue Recognition Module

In my last blog, I discussed NetSuite’s new Advanced Revenue Recognition (ARM) module at a high level, and now I’m going to deep dive into some of the key functionality.

Revenue Arrangement Record

This is a new record type which serves as the central hub for all revenue-related data. When a Sales Order is created, the Revenue Arrangement record is auto-created by NetSuite, based on the Revenue Rules defined on the Item records. The ARM Revenue Rule record itself is mostly unchanged, mostly just receiving some expanded recognition timing options, but otherwise familiar-looking to existing users.

Prior to NetSuite version release 2016.2, everything required a Revenue Rule and passed through the Revenue Arrangement. However, as of the 2016.2 release, NetSuite slackened that requirement, and now it is possible to exclude items from the ARM process. Doing so causes the item to be recognized fully by the Invoice. However, a Sales Order cannot include a mix of excluded items and Revenue Rule items.

Also, in ARM, there are NO revenue-related fields left on the Sales Orders. The Sales Order is for selling – period. All rev rec data goes on the Revenue Arrangement record.

A look at the new Revenue Arrangement record.

A look at the new Revenue Arrangement record.

Revenue Elements

The Revenue Arrangement thus shows all items along with their revenue value. These Revenue Arrangement line items are called Revenue Elements. Again, this is an actual record. The Revenue Arrangement shows the most relevant info about each Revenue Element, but if you want, you can open up each line to its underlying Revenue Element record and see what is captured there. For the most part, though, the Revenue Element is read-only, since much of its information is derived from the combination of other sources. 

Revenue Plan

Each Revenue Element/Revenue Arrangement line item has a link to a Revenue Plan record, which is the equivalent of the current module’s Rev Rec Schedule. The Revenue Plan shows all the relevant information derived from the Revenue Rule and then shows you how NetSuite understands that to play out into the coming months.

One interesting detail here is that ARM will typically create (at least) two Revenue Plans per item. One is the “actual” plan, and the other is the “forecasted” plan.

The presence of the “forecast” record allows NetSuite to bridge the missing gap and deliver much better Rev Rec reporting. Under the current module, the problem is that GL is disconnected from the Rev Rec Schedule. So, it is impossible to accurately run a report that ties the forecasted revenue to the GL.

Under ARM, that problem is abolished. NetSuite delivers numerous excellent reports that show you everything that is going on with your forecasted revenue, with your recognized vs deferred positions, etc., all in a way that ties to your real figures. This type of reporting that ties with the GL is one of the most significant and lasting effects of using ARM.
A Rev Rec Plan. Notice listing at the bottom showing expected monthly recognitions.

A Rev Rec Plan. Notice listing at the bottom showing expected monthly recognitions.

Multi-Element Arrangements

The real strength of ARM – and frankly, the real reason NetSuite had to develop a new module rather than expanding the old engine – is the handling of Multi-Element Arrangements (MEAs). Maybe you’ve heard of this concept as simply “VSOE handling.”

The current functionality NetSuite offers to handle MEAs is pretty basic and struggles when you introduce even mildly complex pricing and business realities such as returns and credits. It’s possible to handle all of that in the old module, it’s just tedious and labor intensive. ARM marvelously takes care of those problems. Many new records are provided to help you define your item values: Fair Value Formulas, Revenue Allocation Groups and Fair Value Price Lists, Item Categories, Fair Value Dimensions.

Fair Value

Much of the new functionality within ARM rests on the concept of Fair Value. Defined briefly, Fair Value is an objective market price for goods and services sold, which can be different from the sales price. Accounting-wise, I need to declare Fair Value for my items independently of discounted sales prices.

Fair Value Formulas allow the definition of small dynamic formulas applicable to items. The language used is similar to what you enter into a Saved Search formula field.

Formulas can be very simple, for example just “{amount},” saying that at its base, this item’s Fair Value can be assumed to be the same as its sales price; or, they can be complex, for example “{fairvalue}*GROUPSUM(Software,{amount}),” which means that this particular item’s Fair Value is deemed to be a percentage of the sales value of all software found on the same arrangement. The formula approach can handle the simplest to the most complex Fair Values.

The rest of the Fair Value-related records all work together to help you assign Fair Values to your various items, and capture the rest of the complexity surrounding Fair Value pricing. For example, there is functionality to handle tagging specific items as VSOE pricing (as opposed to purely estimated values), functionality to tag Fair Value dynamic formulas to whole categories of items, or very specifically to just one item, etc.

In summary, the new ARM module is a robust module with all the functionality you need to help your business thrive under ASC 606 standards. 
Fair Value Price

The Fair Value Price record allows fine-tune control when various Fair Values crash together in MEAs

Notice the Allocation Detail screen on Rev Arrangements. NS transparently shows all the calculations it makes to determine your final allocation.

Notice the Allocation Detail screen on Rev Arrangements. NS transparently shows all the calculations it makes to determine your final allocation.

Next Steps

Because of the complexity of the module setup, NetSuite has a special “Partner Enablement” program for ARM, which means that solution providers must have accomplished an intensive training and evaluation process to be allowed to be recognized as “enabled” for this module. I’m proud to say that Tribridge is among this elite group of certified partners.

Contact us for additional guidance on ARM, or, leave me a comment below if you have a question you'd like me to answer.

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