NetSuite basics – Sponsorship’s and Deferred Revenue Processing
In case of any event being organized by a corporation, the corporation receives payments from sponsorship customers for specific promotional motives. Usually, these sponsorship contracts contain ‘Contingency’ as well as ‘Metric-Based’ payments to offer a justified conformance with the value of the publicity being generated.
Apart from these, there are multiple subsidiaries that enter into retainer contracts as well, either as fixed price contracts, or as advance payments for future services that are rendered over the year or across multiple fiscal years.
As multiple stakeholders place themselves into these contracts, there emerge certain issues that the company has to face regarding their management. The issues span the following:
- Identifying the entity that are the custodians of the contracts
- Identifying the Finance Resource(s) that transact and report on the sponsorship activities
- Ensuring the matching principle is followed, so as to categorize ‘unearned vs. earned revenue’ and ‘Prepaid vs. Actual costs’
- Establishing a ‘sponsorship grid’ that captures type of revenue and the period it belongs to; revenue recognition compliance; known milestones for payments; charge-backs that are over and on top of the contract; entities that share the revenue and the pro-ration %; currency of sponsorship
- The milestones are not captured through a known system and are based on information received from sponsorship sales, other service providers and free-form estimates from contractors.
- Sponsorship revenues should have associated sponsorship costs, and these also need to be tracked to comply with FASB/GAAP/IFRS
- Sponsorship P&L needs to be drafted, along with the appropriate break-down of direct costs, and associated SG&A
To manage the various constituents of the ‘sponsorship grid’, all sponsorship revenues need to be captured through a central custodian subsidiary, which allows an optimal processing of the revenues without inconveniences.
The process of managing Sponsorships is deployed as a combination of the following:
- Identified Contract Finance resource(s) should Maintain Monthly workings within a ‘Sponsorship workbook within the NetSuite File Cabinet within a folder called ‘Sponsorships’ , ‘Sponsor Name’ etc
- The work-book should contain the following information at a minimum:
- Indicator if revenues and costs are all-inclusive or over and above the contract;
- Fiscal Period for re-class into earned revenue/Prepaid Expenses, amount of Re-Class, Reference Journal id of the re-class;
- Allocation of revenue/expenses to appropriate subsidiaries/events, contact within the account management team for any clarifications, comments
- Fiscal period, Sponsor Information, Event/Show, Amount broken up into events, tasks(type of revenue/Costs);
- Each Month, Prior to ‘close’ – The ‘work-book’ needs to be updated Re:
- Deferred revenues to be re-classed to Earned revenues
- Prepaid Expenses incurred towards these revenues should also be classified as ‘Actual’ expenses
- Prior to month-end close, the Deferred Revenue and Prepaid Costs need to be validated for correctness, and the end balance for the month in the sheet should match the Prepaid and Deferred Revenue balance (Drill-Down of Prepaid and Deferred Revenue from the ‘Balance Sheet’ as of the Month-End) in NetSuite
- Deferred Revenue and Prepaid that do not contain a Customer/ Vendor / Event – need to be re-classed to include such information
- Once these are validated, Corporate Finance will have to use the Sponsorship Workbook – for effecting Intercompany transactions, so as to allocate revenue / cost to specific subsidiaries and event(s)
Questions that need to be addressed
Once these solutions are implemented, a handful of questions arise that need a swift tackling vis-à-vis their criticality and the relevance to the said revenue processing.
- How do you validate the Financial Statements of the Subsidiary with other subsidiaries as it relates to the intercompany charges?
- How will the individual subsidiaries budget for and account for the actual inflow/outflow?
- How will we report Deferred Revenue and Prepaid Expenses; and whether these will be reported through the custodian subsidiary for the unearned / prepaid portions, and through the recipient subsidiaries for the earned / incurred portions (P&L)?
- How will this affect the Taxes as it relates to each individual entity?
ZAG’s solutions confer an assertive addressal to the problem statement of multiple subsidiaries stepping into a sponsorship contract and offer an efficient way to manage the revenue generation along with cost-effectiveness of the accord.