In customer projects, contracts are generally awarded in 2 parts: (1) the construction / delivery of a product / service, and (2) the subsequent service or product maintenance.
In this document, I will discuss on the usage of the Results Analysis from perspective of integration between SAP Project system and other modules, in particular Sales and Distribution and Costing. This document will discuss on the Revenue Recognition and Project Billing.
The scenario is based on a customer project which uses Project System for delivery of product service and maintenance contracts. In particular, it will focus on the second part revenue recognition for the service or product maintenance using time-based method of revenue recognition.
The project is first set-up using a project template for customer project. The project structure will vary from customer to customer. But, just for simplicity purposes, the document presumes two WBS elements for the project structure: (1) the delivery of product/service and (2) the maintenance project.
Scenario: A company sends an invoice to a customer for a 12-month maintenance contract of SG$ 100,000.00. The revenue recognition is based on time-proportionality on the validity of the maintenance contract.
Accounting Flow:
From accounting requirement, the revenue should be amortized over the period of the maintenance contract. One way is to leverage on the Results Analysis in Project system and its integration with the billing in Sales and Distribution.
Below is a sample illustration of the revenue recognition based on time-proportionality.
Table 1. Revenue Recognition and Project Billing
The billing is done at the start of the contract, a total of 100,000.00 for the whole maintenance contract.
- Customer 100,000.00
Cr. Project Revenue 100,000.00-
However, the full-amount cannot be recognized on January since the service is for the 12-month period and has not yet been delivery. The revenue will need to be recognized over the contract duration based on the time lapsed. The remainder should be accounted as Unearned or Deferred Revenue in the Balance sheet account. Over-time, the unearned or deferred revenue will be reduce and recognized as revenue based on the time lapsed.
In SAP Project System, there are several setting involved. I will discuss the two important setting:
1- Measurement Method (Time Proportionality)
As per SAP’s definition, this measurement method determines the percentage of completion proportional to the time required. The system assumes linear project progress over time.
Figure 1. Setting for measurement method
2- Results Analysis Key
The Results Analysis Key determines how the valuation of revenue and costs will be calculated for the WBS element. It is powerful tool and can be configured in a number of ways. It is not the intention of this to explain each field but to highlight only certain items in the valuation method.
- The RA type and Profit Indicator will need to use Earned Value and Percentage of Completion. This will allow the system to calculate the POC% over the period of time.
- The Progress version needs to be defined as well from which the progress analysis data is stored.
- Plan version is also important in determining from which CO Plan Version to pull the Plan Revenue / Plan Cost. It is recommended to use the CO version for results analysis.
Figure 2. Partial Screenshot of the RA Key setting
Note: there are other settings that need to be done; the intention of the document to illustrate functional-wise the use of time proportionality.
Process-Steps
The subsequent discuss the master data set-up and transactions involved for the revenue recognition and project billing.
I. Master Data set-up:
The master data set-up is determines largely how the valuation for the WBS element is calculated. The appropriate fields need to be set at the master data level in order for the month-end programs to calculate the values correctly.
1- Results Analysis Key
It is required to set-up the WBS element in the template project structure. The WBS element must contain a results analysis key to define how the accrual or deferral of revenue is to be recognized in a project.
Figure 3. RA Key in the WBS element master data
2- Progress Version and Measurement Method
In SAP help, project progress is stored in the CO version 100 – Progress Version. It is stores and records the progress analysis data. An important field is to be maintained is the measurement method. The measurement method defines how the progress is determined.
Figure 4. Measurement method in WBS element
3- Plan Revenue / Plan Cost
Plan revenue and costs needs to be defined as well. This is determined from the setting in the Results Analysis for valuation. This means that the plan value needs to be defined in the correct CO version.
Figure 5. Plan Revenue
4- Basic Start / End Date / Actual Start Date
In SAP setting, the dates in the master data need to be defined to calculate the overall duration of the project. The system also factors in the factory calendar in order to determine the total number of working days.
It is possible to base the progress on Planned POC or Actual POC. For planned POC, basic dates need to be maintained. For actual POC, actual dates are maintained and final confirmation is required. In this example, the setting is using Planned POC.
Figure 6. Dates in WBS element master data
II. Sales Document (Contracts)
For maintenance contracts, business development generally requires to know several dates such as contract start/end date, contract duration, other dates (such as acceptance date), and other information (such as Renewal, Termination)
In the SD, it is recommended to use the Contracts Order type as it provides the needed fields without extensive customization. These info can be stored at the Sales Order (Contract) for retrieval and useful for operation.
Figure 7. Contract Information in Sales document
In addition, the billing plan in the sales order manages the billing terms to the customer. The billing cycle can be yearly, quarterly, or monthly and other information such as start of the month, end of the month can be defined in this area. These can help user to easily manage the information in the Sales order for project billing. For the purpose of this example the project billing is yearly.
Figure 8. Billing Plan
At the time of Invoicing, the accounting document is also automatically generated for the Sales Contract.
- Accounts Receivable 100,000.00
Cr. Sales 100,000.00-
III. Month-end Closing Steps:
At month-end, the following transactions need to be executed in sequence in order to calculate the Recognized Revenue and Unearned Revenue
1- CNE1 – Calculating the Project Progress
This step measures the project progress based measurement method defined in the WBS element. The project progress result is stored in the progress analysis version “100”.
2- KKA2 – Calculating the Project Revenue and Cost
This step valuates the WBS element according to the setting of Results Analysis.
Month 1
Refer to Table 1, in the results analysis screen, users will be able to see the following:
- POC % of 8.23%. Calculated based on the cumulative number of days / total duration
- Planned Revenue is 100,000.00 (from the plan revenue)
- Actual Revenue is 100,000.00 (from the project billing)
- Revenue Affecting Net Income is 8,235.00 (from the POC % x Plan Revenue)
Figure 9a. Results Analysis (January)
On the same screen, the Results Analysis will also calculate the inventories (WIP / Revenue In Excess of Billing) and Reserves (Accrued Expense / Billing in Excess of Revenue).
- Billing in Excess of Revenue of 91,756.00 which goes to Unearned Revenue or Deferred Revenue
Figure 9b. Results Analysis (January)
Month 2
Refer to Table 1, in the results analysis screen, users will be able to see the following:
- POC % of 16.08%. Calculated based on the cumulative number of days / total duration
- Planned Revenue is 100,000.00 (from the plan revenue)
- Periodic Actual Revenue is 0.00 (from the project billing)
- Revenue Affecting Net Income for the period is 7,843.00. Cumulative is 16,078.00.
Figure 10a. Results Analysis (February)
On the same screen, the Results Analysis will also calculate the inventories (WIP / Revenue In Excess of Billing) and Reserves (Accrued Expense / Billing in Excess of Revenue).
- Billing in Excess of Revenue is reduced to 83,922.00, which is equivalent to the 7,843.00 recognized for the month.
Figure 10b. Results Analysis (February)
- 1- CJ88 – Transferring the Recognized Revenue and Cost to Financial Accounting
After executing the results analysis for valuation, settlement needs to be performed to transfer the valuation results to the General Ledger.
Month 1
The accounting entry for the settlement will be as follows:
Dr. Project Revenue – BIER 91,756.00
Cr. Deferred Revenue - BIER 91,756.00-
Net P/L recognized for the period will be as follows:
Project Revenue 100,000.00
Project Revenue – BIER 91,756.00-
Net Project Revenue 8,235.00
Month 2
The accounting entry for the settlement will be as follows:
Dr. Deferred Revenue – BIER 7,843.00
Cr. Project Revenue – BIER 7,843.00-
Net P/L recognized for the period will be as follows:
Project Revenue 0.00
Project Revenue – BIER 7,843.00-
Net Project Revenue 7,843.00
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