Revenue Accounting and Recognition (RAR) Part-1
Revenue Recognition in SAP
Revenue Recognition is the process of recognizing the income, when a sale contract is fulfilled and ownership of goods/service are transferred from the seller to the buyer or customer. Traditionally revenue recognition happens in SD through the billing invoice functionality in SAP. The traditional Revenue recognition functionality in SD works as below:
SAP SD offers an integrated Revenue recognition based on SD Documents. With SD Revenue Recognition, invoices are posted to Deferred Revenue (depending on Previous Recognized Revenue Items) with recognized revenue also posting to COPA.
What Changes with New Updates on IFRS 15?
IFRS 15 is an accounting standard promulgated by IASB providing guidance on accounting for revenue from Contracts with customers. It was adopted in 2014 and will become effective as mandatory for US and most of Europe from January 01, 2018. The IFRS 15 has new disclosure changes, both quantitative and qualitative information about the amount, timing and uncertainty of revenue from Contracts with customers. The New IFRS 15 and ASC 606 revenue accounting standard basically follows a five step model for recognition of revenue:
Drawbacks in Existing SD Revenue Recognition Process:
1) No multiple Element Arrangements: The traditional Revenue Recognition in SD does not offer allocation of transaction price, one of the fundamental step for New updates on IFRS 15. Revenue is always recognized separately for every SD Order Item according to its pricing conditions.
2) Parallel Accounting: The traditional Revenue Recognition cannot manage different accounting principles. With New GL, it makes an accounting postings to all the ledgers at the same time (Ledger group is blank on the accounting document header), negating automation and increasing the reconciliation efforts for accounting teams.
3) Cost Recognition: COGS is not reconciled with revenue recognized. However, SD can recognized the cost only at the time of PGI or billing depending on the set up of pricing schema in SD
4) Disclosures and Reporting capability: The traditional SD Revenue Recognition is not capable of meeting the new disclosure requirements for IFRS 15
Impact of the changes Accounting Standard IFRS 15 on Customers
The new accounting standards is a mandatory rule for US and Europe. Early adopters of IFRS can start earlier. The customers most impacted by the New Standard are as below:
Example of Revenue Recognition in case of Multiple Arrangements
Mr A buys a Phone for $ 1 from a telecom company with a guaranteed Service Contract of $ 20 per month for 24 Months. The total Transaction price for phone and service contract for Mr A will be = (1+(20×24)=$ 481)
Mr A can also buy the Mobile Phone on a standalone basis for $180. Mr A can also enter into a standalone service contract with the telecom company for $16 per month for 24 Months (Total Transaction Price = 16×24=$ 384)
In this case, if Mr A purchases the service contract and phone from the telecom company, the charge for the mobile and service contract has to be allocated over a period of 24 Months to recognize revenue as per IFRS 15.
Allocated Price of Mobile Phone = Standalone Selling Price of Mobile Phone/(Sum of all Stand Alone Selling Price)* Complete Transaction Price
The SAP Revenue Accounting and Recognition Component is based on the 5-step model of IFRS 15 and also meets the requirement of FAS 2014-09/ ASC 606:
Step 1: Revenue Accounting combines items from different operational systems like SD, CRM or non SAP Systems in one single revenue accounting contract. The contract is the operational object for the determination and allocation of Transaction Price
Step 2: The Performance Obligation (POB) is the level, where the Standard Selling Price (SSP) is determined or defined, price is allocated and fulfillment (POC) is determined. Most of the times it would correspond to a line item of an operational contract, but it may also be a combination of several items Eg, from a Sales BOM, implicit obligation ( Eg, Upgrade for a licensed Software)
Step 3: The transaction price is determined from Pricing Conditions of operational document such as a sales order.
Step 4: The Transaction Price is allocated to POB of a contract on a relative SSP basis
Step 5: Revenue is recognized on the completion of POB. The completion can be defined as an event or over time. The over time fulfillment can be calculated based on time based or based on Percentage of Completion.
With the above design principles, the SAP Revenue accounting and recognition (RAR) Component has been introduced. It is an optional download component on SAP ERP (ECC). The Component is the only possible component for Revenue Recognition in SAP S/4HANA Finance
The component can be downloaded by any customer with SAP S/4HANA
The Current version of RAR available is 1.1 and version 1.2 has been released to a select customers.
In the next part of this series I will talk about the set up of SAP RAR 1.1 and the accounting flow for revenue recognition through the same.
This is very informative. Thanks for Sharing.
Thanks a lot Jignesh Kansara
Really good insides provided. Keep enlightening...!
Thanks a lot Aditya Kotak
Useful information. Thanks a lot.
Thanks a lot Narayana Murty Panyala
Useful information. Thanks a lot for sharing
Looking forward for your next blog
Thanks & regards
Thanks a lot
Super jee..Super Jee
It's very useful information. thx for sharing, and we are looking forward for your next blog
With RAR 1.2, can this be used with Classic GL? Not sure how it fits with the Ledger approach
Thanks Sanil. This is helpful post.
1 qq . Can we implement full functionality of RAR with Central Finance ? or does it require the full Simple Finance ?
RAR should ideally implemented with logistics integration as well to recognize out of box functionality. With CFIN, it may not work completlty
Thanks Sanil for information. Do you have any further additional information around the key risk areas from accounting stand point, IMG changes, tcode affected from RAR ?
Can RAR work without SD module or that is a pre-requisite?
Thank you for your article on RAR.
You said that in the next part of this series you will talk about setting up SAP RAR 1.1 and the accounting flow for revenue recognition across the same.
Did you do it?
If so, I would like to read it to learn how to implement SAP RAR in SAP Cloud
Please help me with this doubt. I want to link POB in SAP ECC to Sales Contract of SAP CRM.How to do that.I just need table where it is maintained from SAP BW reporting point of view
This is really very good article and very informative.
When are you releasing the Part II?
Thanks a lot Former Member
I should be publishing it end of next month
Great Blog Sanil ! Thank You!!
Can you please post the next blog in the series?
Thanks for writing this blog and sharing knowledgeable info. Do you have second part as well? I need to know what all configuration is required in ECC for RAR..would be great if you can provide some pointer.
Question regarding the Cost Recognition. Is it really required to send an SD02/SDFI to trigger the Cost Correction? If my POB is time-based and does not require a Goods Issue, what is the best way to make RAR create a Cost Correction?
Thanks in advance.
Your article is enlightening. I would like to ask if there are more articles on RAR please. You were mentioning at the end of your article a follow up describing the accounting flow.
Thanks Sanil for informative blog. Please let me know the link for Part 2 of the blog.
Thanks in advance.
Hiw can i get total RAR configuration document for implementation..
Please help me
Really good insides provided. Well done!
Muhammad Hasan Mufid
very good information provided.
where is the link for part-2.
I have a quick clarification :
Appreciate your response.
Thanks Sanil, great article!! I hope you don't mind I am using your article as a reference to my blog post - Three Growth Opportunities for Sales & Distribution (SD) consultants
Could you please let us know
1- on what version of S4 HANA , have you used RAR?
2- For S4HANA 1809 , 1909 , 2020 , what is the way forward to activate RAR, is there a new Add-on available or no Add-on requered. (i searched SAP notes , but most of them says about connectivity with ECC and upgrade option etc, and not for new S4HANA 1809,1909 and 2020)
Got through your blog , but it deals mostly with functional approach, my questions are on how to get started on technical implementation part, which unfortunately is not found .
Many thanks for anyone who can shed some light on this?
Thank you for this document. Do we have to do any configuration to achieve this or its already inbuilt in SAP. Do you have any document for this to share with me. A simple guide please?