1. Revenue Recognition Overview
All companies must report revenue accurately and in compliance with the accounting standards under which they report. Accounting standards have undergone many changes in the last years to reflect changing business models. This development is not expected to ever come to an end.
A constant, however, is that in simple terms revenue should be recognized when it is earned – that is all goods and services have been delivered to the customer and no obligations remain. Sounds easy but may become quite complicated depending on the underlying sales process. Supporting financial departments by business applications that replace still common inefficient use of spreadsheets becomes more and more inevitable.
The market for cloud revenue recognition software is fragmented and consists of niche players offering standalone solutions and companies that increasingly bundle revenue recognition functions into their suites or best-of breed financial software as tightly integrated part. Also hybrid offerings, i.e. selling revenue recognition as part of Financials as well as standalone are available.
These offerings vary in their levels of handling complex revenue recognition requirements and usually include support of both simple and complex (e. g. multi-element arrangement) requirements.
For more details on revenue recognition and multi-element arrangements please see Jim’s blog.
2. Revenue Recognition in SAP Business ByDesign
Revenue recognition in SAP Business ByDesign is a core financials function from the outset and has been enhanced with subsequent releases. Not just recently it has emerged as a selling proposition for Financials and the entire SAP Business ByDesign. Due to ongoing regulatory changes with respect to revenue recognition these functions must always be kept up-to-date and thus will always require additional development.
Major characteristics of revenue recognition in Business ByDesign include:
Covering all basic revenue recognition types
Financials in Business ByDesign allows for handling all basic revenue recognition types required by major accounting principles:
- Event-based revenue recognition required for sale of goods and services
Dedicated events that occur during the course of a sales process can be used to determine ‘delivery’, i. e. the transfer of title.
The solution allows for 4 distinct methods for determining the transfer of title.
- Time-based revenue recognition required for selling services and usage rights that extend over time
For customer contracts the contract value is spread over its duration and assigned to and realized for given accounting periods.
There are 3 distinct pre-delivered methods of assigning revenues to period.
- Revenue recognition based on percentage-of-completion for long-term contracts.
Financials in SAP Business ByDesign allows for using the completed contract and cost-to-cost method which is most common in the market.
Revenue recognition in SAP Business ByDesign is tightly integrated into all relevant operational business processes and the Financials application. Thus basic Financials capabilities such as parallel accounting, account determination, real-time reporting, configuration, and extensibility also apply to revenue recognition.
Revenue recognition in SAP Business ByDesign may be switched on or off as needed during business configuration. In fine-tuning specific controls can be automatically assigned to sales documents based on specific characteristics such as company, set of books, scenario variants, and even particular sales documents only.
If customers need additional revenue recognition functions beyond the pre-delivered capabilities, they may develop their own specific enhancements through the Partner Development Infrastructure (PDI) and business add-ins. In the end any calculated quantities and values will automatically be considered by subsequent standard procedures.
Furthermore, revenue recognition in SAP Business ByDesign is open to integrate 3rd party revenue recognition solutions.
Any 3rd party solution can read all information needed from the system, calculate the amounts for earned revenues and corresponding cost of sales, and write back the results. Also here, SAP Business ByDesign then takes care of accountancy and creates the respective journal entries.
Customers may take manual control of indicating the transfer of title as well as accrued and recognized figures. They can override automatically calculated data for using their own calculations instead. By specific user interfaces they can enter quantities, amounts as well as percentage-of-completion manually.
- Support of industry-specific regulations
Specific industries have special regulatory requirements, such as e. g. for buyback agreements, sale with right of return, franchise sales, multi-element arrangements (including carve-outs and assignment of fair values), etc. These are not fully supported with Business ByDesign currently. Focusing on a broad basis first has been a deliberate decision.
It is important to know that the current underlying architecture allows for any enhancement without disruption. Customer- and industry-specific requirements will be addressed as we enhance our reach.
However, already today, through the adaptability options mentioned above missing capabilities may also be realized as project solution.
Automated revenue recognition functions receive more and more attention by customers and the market. Business ByDesign is well positioned to cope with basic and specific requirements and is ready to expand its functional scope.
We are happy to discuss and exchange ideas.
Chief Product Expert
SAP Business ByDesign