Revenue Recognition, Reconciliation and Settlement Systems

The recognition of revenue is perhaps one of the most important events that takes place in any organization. Knowing what constitutes recognition of revenue, how to recognize it, and how to work onwards from there while maintaining a strict internal control on the entire process is the challenge.

SOX mandates that there be sufficient internal control on all financial reporting. This means that all processes, procedures and systems that in any way have a direct impact on financial reporting need to be automated, secure and auditable and subject to change management and access control procedures.

This also means that all the systems that provide data for financial reporting also be subject to the same strict control guidelines. In an organization that has multiple revenue sources and different modes of service delivery this becomes a challenge.

In an online business model we have distinct revenue streams. We have the online ads revenue stream, the ecommerce and online subscriptions revenue stream and the mobile services revenue streams. The business model for each of these streams is different. The revenue recognition model for each of these streams is different. The criteria for settlement of revenue is different. Given that there was such diversity in the business models of each of these streams, it was necessary to have a process and system to allow the revenue recognition, reconciliation and settlement across all these streams.

This was the driving force behind building these systems. The objective was to have a complete system that covered the complete cycle business cycle which included contract and credit approval of the clients, processing of revenues accrued, recognizing revenue, reconciling revenue with the delivery, business partners and payment partners, and settlement of the payments/collections after reconciliation.

The Ads revenue business is the single largest contributor of revenue to the organization. The different actors in this business model are the clients and agencies, the ad networks, the consumers and the online customers. The business cycle begins with the orders being booked for the display of ads on the site. Depending on the type of the campaigns and the order, a contract and credit approval system approves the campaign for that client. There are a set of business rules configured in the approval system that routes the order through the appropriate approving authorities. The campaigns are delivered through a set of ad servers depending on the nature of the campaigns. The delivery details of the campaigns along with the contract details containing the delivery commitments and the agreed upon rates for the campaigns become the inputs to the revenue recognition system for the ad sales business. This system calculates on a daily basis the revenue accrued for the day as well as till date. The system has business rules that recognizes the revenues as per the defined criteria and also generate the billing/payment advices for the campaigns as and when they become due for billing. The system ensures that the committed deliveries are considered for billing. It reconciles the daily deliveries as well as the time period for the campaign in arriving at the billing advices. Once the billing advice is generated it is sent to the Common Account Manager for invoicing and further collection/payments as required.

The mobile services business has its own method of arriving at a settlement of payments/collections. The sms that are sent through various operator circles are tracked in our servers. This is tracked by operator circle, by keyword, by application, by service. The operators themselves also track the sms that originate through our servers. At the time of recognizing the revenue and billing for revenue share with the operators a reconciliation of both the company’s records and the operator’s records is carried out before deciding on the counts that need to be settled for payment. The input to the revenue system from the company is the application logs that track all the sms sent for the various operators and the products downloaded from the different vendors. The input from the operators and the vendors is their statement of the same counts. These statements are then reconciled in the system and after the necessary negotiations/approvals, the settlement is carried out.

In the case of the ecommerce and online subscriptions business, the reconciliation is done between the orders/services sold online and the payments made at the payment gateway/banks. The payment gateway/banks send a daily/monthly statement containing the payments collected against the orders which is then reconciled against the internal logs maintained in the system. The vendors and logistics partners deliveries are similarly reconciled using their statements to reconcile with the recorded deliveries/orders as entered in the company’s books.

The entire reconciliation, recognition and settlement process is carried out by the revenue reconciliation and settlement systems that have been built for this purpose. The invoicing and tracking of collections/payments is done through the common accounts manager which is part of this system. The journal vouchers that are generated for the transactions are summarized and the summaries are exported to the General Ledger Accounting system which is used for further reports.