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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:




SD Revenue Recognition.jpg

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:


IFRS 15.jpg


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:

IFRS 15 Ind Impacted.jpg

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

IFRS Calculation.PNG

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.



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  1. Former Member

    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 ?


  2. Sanil Bhandari Post author


    RAR should ideally implemented with logistics integration as well to recognize out of box functionality. With CFIN, it may not work completlty





  3. Former Member

    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 ?

  4. Former Member

    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


    Than you


  5. Former Member

    Hello Sir,

    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

  6. Former Member


    Hi Sanil,


    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.



  7. Eric Ching

    Hi Sanil,

    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.


  8. Giuseppe Sorace

    Hi Sanil,

    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.

    Thank you,



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