Deferred Revenue Reconciliation

 

The chart on this page illustrates the process of reconciliation. It shows 14 issues, numbered 1 to 14, served over a specific period, and the placements of orders during that period. The date of the order placement is represented on the Y axis of the diagram.

Individual orders are represented by bars stretching over a number of issues, which is represented along the X axis.  Black/gray bars stand for actual orders, with the gray portion of the bar indicating back issues before the reporting period. Red/yellow bars represent cancellations, with the yellow portion representing cancelled back issues before the reporting period. The individual issues are placed on a time line against the Y axis based on actual or projected publishing dates.

Let us say that we wanted to reconcile the revenue after issue three was mailed (also called served) to before issue 11 is mailed (which is 7 issues of revenue). We're dealing here with two elements, time and issues, which are closely related. Magazine issues are published over time and when delivered the revenue collected for that issue is considered to be earned. Any revenue for issues yet not delivered is considered deferred income -- meaning that yes you may have been paid for a future issue but until that issue is mailed the subscriber is owed those funds. Actually, the publisher owes the subscriber the issues that are yet to be served, which is what copy liability means. So, while the money may be sitting in the publisher's bank account, it's not earned until the issue is delivered. More to the point, any part of an order not yet delivered does not need to be taken into revenue for tax purposes -- this is tax deferral, which is legal in most jurisdictions, versus tax avoidance, which can be illegal. Thus a publisher can postpone playing taxes on income until such time as they have to bear the costs associated with that income, meaning producing and delivering the magazine issue.

In the example on this page, any issues before issue four in orders placed prior to the starting point (line "A") do not now have any deferred revenue liability or income as they have been issued (served), thus revenue is considered to have been earned in the past. The portion of these orders, however, which have not yet been delivered (served) are consider as part of the liability/earned income. Any orders placed after the end of the reporting period, also called the cutoff, are of no concern to the report as they represent future orders to the reporting period. By providing a cutoff, this allow the report to be run at any time for any given period, thus avoiding the requirement to run reports at specific points, such as after an issue mailing.

The first step in the process is to determine the deferred revenue for issues not yet served at the beginning of the reporting period. For explanation purposes, the horizontal line "A" represents the first time horizon to consider, meaning that we must total the orders, both actual and cancels placed prior to the first date of the period requested for that portion of the orders for issues not yet served. To do this, we just total all of the orders placed below line "A", and deduct from this total the portion of the orders that represent issues that have already been served. Served issues in the example, are issues one to three, or those issues to the right of the vertical line marked "B". This gives us our deferred income at the opening. Speaking graphically, we are totaling the portion of the black and red bars below line "A" and to the right of line "B". Note that cancellations are entered in the MA Circulation Manager as negative values, thus summing a cancelled with its corresponding actual order results in a zero sum.

The next step is to sum all actual orders placed during the reporting period. In our chart, these are the actual orders placed between horizontal lines "A" and "C", which gives us the revenue added in the period. After this we need to sum the total amount of cancellations in the period, which gives us a negative amount, and are those cancelled (red/yellow) orders on our chart between horizontal lines "A" and "C".

Remember, however, that there can be two components to each order – future and back issues. Money paid for future issues, which are those issues yet to be served, is what is considered deferred revenue. In our example, these are those portions of the orders for issues 11 or greater, and are illustrated in the chart by the portion of orders to the right of line "D". We must, therefore, subtract that portion of the orders added in the current period for issues served in that period, which is represented in the chart by those orders to the left of line "D" and between lines "A" and "C". To do this, we first subtract income for back issues in period for actual orders, or that portion of the line, which are represented by the portion of the bars which falls between "A" and "C" and to the left of line "B" as indicated by the color gray. The second step is to subtract the actual and cancelled revenue for each issue served which is mailed in the period, represented here by issue four to ten, whether it’s cancelled or actual. This last step is represented by the portion of the orders which fall below line "C’ and between lines "B" and "D".

The final step is to account for that portion of cancelled orders for back issues prior to the reporting period, illustrated in the chart as the yellow portion of the red/yellow cancelled order bars. As this portion of the order was taken into revenue in an earlier reporting period, it must be brought back as "Unrealized Income Prior to Period." This will balance out the accounting for deferred revenue purposes. To put it another way, as the report starts with the balance of deferred income at the opening, we have to add the value of the issue paid for prior to the period in order for the equation to balance it’s removal. If this is not done, then we have a negative amount reported without its corresponding actual order. The consequence of this would be that the deferred revenue would under-report by the value by that portion of the cancelled orders that represented the issues served prior to the reporting period.

The sum of all of the above mentioned calculations would give us the calculated ending balance for deferred revenue. To check these calculations, the system needs only to calculate the total of orders for those issues yet to be served which were placed on or before the end of the reporting period. This final calculation is represented by that portion of orders below line "C" and to the right of line "D". As mentioned, the report is not concerned here with those orders placed after the end of reporting period, represented by those orders in the chart above line "C".

The difference between the calculated deferred revenue and the actual ending deferred revenue balance is called the Variance. A small variance can be expected due to rounding error since the orders hold the total value and not the individual issue price. In the Orders table this is called the Premium, and individual issue price is calculated by dividing this total by the number of issues ordered, or as expressed in equation format: Premium / (EndIssue – StartIssue + 1). If there is a large variance, that is a value greater than a dollar per $100,000 of deferred revenue, then the data in the Orders table must be checked for integrity. To help in this process, a check box on the Revenue Reconciliation screen allows you to print out records that have potential problems. These records are those where it was not possible to balance the individual calculations going into the calculated deferred revenue total against the actual ending balance.

The Revenue Reconciliation screen, allows you to enter the start and end of the reporting period required, which correspond to lines "A" and "C" in the chart. The issues with in the reporting period (those issues bounded by lines "A", "B", "C" and "D") are determine by the systems, which correspond to lines "B" and "C" in the chart. You can opt to preview the report on the screen, and/or print it out.

There is also an option to produce a report of potential errors if the variance is too great. You can also change the publication you are reporting for on the fly, as with most other options in the MA Circulation Manager.

The report produced is as follows:

In addition to the above, the actual report also breaks the data down into different currencies if you accept foreign currency payments. If you accepted, say American and Canadian dollars, the report would have two sections identical to the above, one for each currency.

Note that the MA Circulation Manager version 5.2 and above now adds the ability to track commission payments for subscription sales to agencies based on the channel code assigned to the order. A commission rates can be set for first time subscribers, and a different rate for renewing subscribers.