A Simple, Table-Based Illustration Using Constant Allocated Revenue

Understanding Carve-In, Carve-Out, and No Carve logic in revenue accounting—especially in Oracle RMCS—can be confusing when looking only at formulas. The confusion usually disappears when you see the numbers laid out clearly.

This post walks through a simple, numeric illustration using a constant Allocated Revenue of $4,000, while Gross Cumulative Billing varies across positive, zero, and negative values. The result is a clear, defensible determination of Carve-Out vs Carve-In vs No Carve, along with the corresponding amounts.

Key Rules (Read This Once)

For this illustration:

• Allocated Revenue (AR) = $4,000 (constant)

Carve logic is driven only by the relationship between Gross Cumulative Billing (GB) and Allocated Revenue (AR).

Core Rules

1. GB > AR → Carve-Out
   Excess billing over allocation is carved out and tracked separately (deferred / contract discount).
2. GB < AR and GB ≥ 0 → Carve-In
   Discount is absorbed within the performance obligation allocation.
3. GB ≤ 0 → No Carve
   This represents billing reversal or credit activity, not a pricing discount.

Table-Based Illustration

Allocated Revenue = $4,000

Case	Gross Cumulative Billing (GB)	Allocated Revenue (AR)	GB vs AR	Carve Status	Carve-Out Amount	Carve-In Amount	Explanation
1	8,000	4,000	GB > AR	Carve-Out	4,000	0	Billing exceeds allocated revenue; excess is carved out as deferred / contract discount.
2	4,000	4,000	GB = AR	No Carve	0	0	Billing exactly equals allocation; no discount exists.
3	2,000	4,000	GB < AR (≥ 0)	Carve-In	0	2,000	Discount is absorbed within allocation; revenue allocated exceeds billing.
4	0	4,000	GB < AR (≥ 0)	Carve-In	0	4,000	No billing yet; full allocation is effectively carved into revenue.
5	–2,000	4,000	GB < 0	No Carve	0	0	Negative billing reflects credit/reversal activity, not a discount.

How the Carve Amount Is Derived

Carve-Out Amount

Carve-Out = Gross Billing – Allocated Revenue
(Only when Gross Billing > Allocated Revenue)

Carve-In Amount

Carve-In = Allocated Revenue – Gross Billing
(Only when Gross Billing ≥ 0 and < Allocated Revenue)

No Carve

If Gross Billing ≤ 0 OR Gross Billing = Allocated Revenue
→ Carve Amount = 0

Visual Intuition (Why This Works)

• Carve-Out
  Customer is billed more than allocated revenue → excess must be deferred or carved out.
• Carve-In
  Allocated revenue exceeds billing → discount is absorbed within the performance obligation.
• No Carve
  Either billing exactly matches allocation or billing is negative → no pricing discount exists.

Audit-Safe Design Rule (Recommended for Functional Design)

Carve Status Determination Rule:

• If Gross Cumulative Billing > Allocated Revenue → Carve-Out
• If Gross Cumulative Billing < Allocated Revenue and Gross Cumulative Billing ≥ 0 → Carve-In
• If Gross Cumulative Billing ≤ 0 or equals Allocated Revenue → No Carve

Final Takeaway

This table-based approach removes ambiguity and ensures:

• Correct carve classification
• Accurate contract discount reporting
• Clean rollforward and GL reconciliation
• Strong audit defensibility

If you can explain your carve logic using a table like this, you are aligned with both RMCS system behavior and ASC 606 accounting principles.

Additional Notes:

Why Ignoring Negative Billing Breaks Carve Accuracy

Below is a clear, structured explanation that resolves the confusion and shows why negative billing must be considered in carve calculations, while still keeping carve classification correct.

The Core Problem You Identified

If negative billing is excluded from Carve-In / Carve-Out calculations, then total contract-level billing cannot be accurately allocated to POBs using relative SSP.

This statement is 100% correct.

Here is why.

Two Different Concepts That Often Get Mixed Up

1️⃣ Carve Classification (Status Flag)

This answers:

Is this a discount scenario or not?

• Carve-In / Carve-Out / No Carve
• Driven by business meaning
• Negative billing is NOT a discount

2️⃣ Billing Allocation Mathematics

This answers:

How much billing must be allocated to each POB?

• Must always use total cumulative billing
• Negative billing must be included
• Otherwise totals will not reconcile

👉 Negative billing affects allocation math, but not carve classification.

Why Negative Billing MUST Be Included in Allocation

Revenue Rule (ASC 606 / RMCS)

Transaction price allocation must be based on net contract consideration, not selective billing values.

If a contract has:

• Invoices
• Credits
• Rebills

Then net billing = sum of all billing, including negatives.

If you ignore negative billing:

• Allocated billing ≠ actual billing
• Contract asset/liability will be misstated
• Rollforward and GL reconciliation will break

Correct Design Approach (This Solves the Issue)

Step 1: Use Net Cumulative Billing for Allocation

Net Cumulative Billing
= Σ (positive billings + negative billings)

This value must be allocated to POBs using relative SSP.

Step 2: Determine Carve Status Separately

Carve status answers whether a discount exists, not how billing is allocated.

Condition	Carve Status
Net Billing > Allocated Revenue	Carve-Out
Net Billing < Allocated Revenue AND Net Billing ≥ 0	Carve-In
Net Billing < 0	No Carve

✔ Negative billing is included
✔ But it does not automatically create a discount

Example to Make This Concrete

Contract Setup

Item	Amount
Allocated Revenue	4,000
Gross Billing	8,000
Credit Memo	–6,000
Net Billing	2,000

Allocation Impact

• Net Billing 2,000 must be allocated to POBs using SSP
• Ignoring the –6,000 credit would falsely allocate 8,000

Carve Outcome

Net Billing (2,000) < Allocated Revenue (4,000)
⇒ Carve-In = 2,000

Correct
Reconciled
Audit-safe

What Goes Wrong If You Ignore Negative Billing

Area	Impact
SSP Allocation	Incorrect
POB-Level Billing	Overstated
Contract Asset	Incorrect
Deferred Revenue	Incorrect
Rollforward Report	Does not tie
GL Reconciliation	Breaks

This is exactly the failure mode you identified.

Final Rule Set (Use This in Your FSD)

Design Principle:
All billing amounts, including negative billings (credits/reversals), must be included in cumulative billing for SSP allocation purposes.

Carve classification, however, must be determined independently based on whether net billing represents a pricing discount. Negative billing alone does not indicate a discount and therefore does not trigger Carve-In or Carve-Out status.

One-Line Summary (For Stakeholders)

Negative billing must be included for accurate allocation, but it must not be misclassified as a discount.