IFRS 15 and ASC 606 will change how and when to account for revenue with customers
FASB and IASB have issued the joint accounting standard IFRS 15 / ASC 606 “Revenue from Contracts with Customers”. Both boards achieved a standard that is equal in text, consequences and resulting postings, disregarding minor interpretations of probability in a few specific cases. Nevertheless, US accountants as well as their colleagues responsible for IFRS books will face significant changes on the timing of realization, new balance positions and on valuation of revenue.
For those not yet familiar with the standard, we recommend to acquaint yourself with the topic now. As a starting point, we have chosen some materials from different authors. You are welcome to share your sources as a comment to this blog.
- Grant Thornton: IFRS News – Special Edition on Revenue
- KPMG: 2-pager, transition toolkit
- Deloitte: IFRS 15 — Revenue from Contracts with Customers
- PwC: Accounting Topic Main Page
Are you prepared?
IFRS 15 and ASC 606 will enter into force soon. It will have direct impact on your financial KPIs and the presentation of revenue. It might also require to implement or change business procedures and to train your sales force and accountants. In a best case, at this point in time, your analysis has been completed and you are about to implement new procedures these days.
|IFRS||IFRS 15 is relevant for fiscal years starting on or after January 1st, 2018.|
|US GAAP, public entities||ASC606 is relevant for fiscal years from December 15th, 2017.|
|US GAAP, non-public entities||ASC606 is relevant for fiscal years from December 15th, 2018.|
Enhancements in SAP Business ByDesign at a glance
SAP Business ByDesign is an integrated solution where business processes from product sales to payment do trigger financial accounting. We have worked hard to keep the integrated nature of the solution, avoiding to build a revenue management solution aside. Hence, we took as an assumption, that best knowledge about a “contract” (standards’ term) is in the sales department, while knowledge about valuation remains in Accounting. Hence, identification of the “contract” and of performance obligations shall start when entering the sales documents for the products agreed, while the maintenance of manual SSPs or assignment of accrual methods remains task of a revenue accountant.
|Standards Requirements||SAP Business ByDesign|
|Step 1: Identify the Contract with the customer||New: We will introduce a new object, called Revenue Accounting Contract (RAC). It will allow to group Sales Orders and Customer Contracts to a “Contract” as ment by the standards. When entering a new sales document, the sales agent will be able to easily assign it to a new or existing RAC.|
|Step 2: Identify the Performance Obligations||New: The Revenue Accounting Contract will allow to assign Sales Document Items to Performance Obligations.|
|Step 3: Determine the Standalone Selling Price||New: The “regular” list price is by default used as Standalone Selling Price, but a manual one (to be entered by an accountant) can be maintained as well and will take preference.|
|Step 4: Allocate the Transfer Price to Performance Obligations||The Transfer Price is the amount agreed with the customer for the whole contract, i.e. the Revenue Accounting Contract.|
|Step 5: Realize revenue.||Enhanced: To allow posting to new G/L positions (Contract Liability, Contract Asset), existing revenue recognition procedures have been adapted.|
Availability of SAP Business ByDesign enhancements
At first, the enhancements will be available for Early Adopters only. Customers must qualify as described below. General availability is planned with release 1802.
How to apply for the Early Adopter Program
If you are ready for IFRS 15 / ASC 606, you may want to apply for our Early Adopter Program and get early access to the new features. The program is limited to selected customers only. You must confirm to be ready for IFRS 15 / ASC 606 by answering the following three questions with “Yes”:
- Yes – I report to IFRS and/or US-GAAP; in case of US-GAAP I am publicly listed.
- Yes – I need to report according to IFRS 15 or ASC 606 as of January 1st, 2018 in the SAP Business ByDesign system.
- Yes – I have defined and prepared necessary business adaptation to meet the 5-step model of revenue recognition in IFRS 15 / ASC 606.
If you are ready for IFRS 15 / ASC 606, you can register here.
Please note: The number of participants in the Early Adopter Program is limited. Please respond latest by 12th, November 2017. As soon as you are registered, we will contact you with a request for more detailed information to start the qualification process.
Learning more about the new concepts
A series of articles will describe cases explaining these new concepts, along explanatory examples. Please start reading here for an introduction to the parties involved. Follow this link for a preview of upcoming enhancements.
The series covers these aspects:
- Case: Standalone selling price and contract
Sell printing machine including setup and installation service
- How to identify the “Contract with the Customer”,
- How to identify performance obligations
- Standalone selling price and revenue allocation
- Sell from stock and standardized service
- Case: Header discount
Sell printing machine incl. setup service with header discount
- Header discounts affecting revenue allocation basis
- Deviating manual invoice and final accrual at contact end.
- Case: Contracts over time
Sell 12 month ‘Active IoT Remote Monitoring’ service with upfront billing
- Introduce time series
- Contract assets / contract liabilities
- Usage of sales contract
- Accrual methods for time series
- Case: Compound performance obligation
Sell printing machine with mandatory paper feeder unit
- Compound performance obligation identification
- Standalone selling price and revenue allocation basis
- Case: Customer project – basic scenario
Fixed priced consulting project with milestone billing for consulting on new printing facility
- Show project task / sales order item / revenue accounting contract relation
- Progress derivation
- Case: Customer project – dealing with travel and expense
Selling a consulting project with travel and expense invoicing
- Travel and Expenses – pass through to customer
- Travel and Expenses – pass through to customer with markup for administration costs
- Travel and Expenses – fixed price
- Including or excluding from allocation basis of a revenue accounting contract
- Implementation considerations – details
- What to consider before adding the IFRS15/ASC606 enhancements to the scope in SAP Business ByDesign
- What to prepare prior to Go-Live Date
- What to do on to Go-Live Date
More to come
We will come up with more examples in the next weeks. Please follow this blog to get notified (using the button on top of the article).
The coverage of the IFRS15/ASC606 enhancements in SAP Business ByDesign depends highly on how customers have modelled their business scenarios. It needs a thorough analysis of the current or intended business scenario implementation for every single customer.
- SAP Business ByDesign supports a high variety of business processes. Many variations of these processes have been implemented by our customers. The SAP Business ByDesign enhancements cover the main business processes and implementation details which are highlighted in case documents.
- The IFRS15/ASC606 standard probably forces customers to change business processes in their underlying systems to comply. The degree of out of the box coverage of the SAP Business ByDesign enhancements highly depends on how customers currently have modelled their business scenarios.
Here is a list the known boundary conditions to support SAP Business ByDesign customers in their adoption process:
- The enhancements must be activated in scoping.
- Sales orders, and/or customer contracts must be used. These objects still trigger pricing, and fulfillment, carry invoicing schedules and terms, and many other operative aspects. Customers will still have to revisit whether their current use must be adapted to meet regulatory requirements.
The new revenue accounting contract complements these objects to form the contract as defined in IFRS15/ASC606 standard and being able to recognize performance obligations from a financial accounting perspective.
Boundary conditions for the Revenue Accounting Contract
- A sales order / customer contract can be assigned to one revenue accounting contract.
- A revenue accounting contract can be referenced by several sales orders and/or customer contracts.
- A revenue accounting contract does not exist or provide enhancements without an assigned sales order and/or customer contract.
- Changes of sales document items to performance obligation assignments are only possible before setting the sales document to released.
- A performance obligation must at least consist of one sales document item.
- Sales kits do not support revenue recognition (as in previous releases). Neither the sales kit header nor it’s items can carry an accrual method. Therefore all revenues and cost on these items are realized immediately. Moreover these sales order items that refer to a sales kit do not take part in the allocation basis of a revenue accounting contract. On sales kit items no sales conditions are currently derived, therefore also no standalone selling price in the revenue accounting contract is available.
- Existing customers must create new G/L accounts, update their account determination rules, and extend their balance sheet and income statement reporting structures. For new customers, the G/L Accounts and the account determination are preconfigured.
- Accrual method determination must be revisited and adapted to IFRS15 /ASC606 requirements.
- Handling contract changes:
- In the beginning, we will support contract modifications according to IFRS 15.20 and IFRS 15.21b (retrospective changes).
- Additional products can be added to an existing revenue accounting contract by assignment of a new sales order.
- or create a new sales order item as new performance obligation to existing revenue accounting contract
- Limited support of prospective changes (IFRS 15.21a) in initial scope
Customers must manually close partially delivered or fulfilled sales orders, customer contracts and hereby also close the revenue accounting contract. Customers can create new sales orders, customer contracts and assign them to a new revenue accounting contract with the remaining or changed quantities including the cause that lead to a new revenue accounting contract according to IFRS15 / ASC606 (IFRS 15.21a prospective).
- Multi-customer projects won’t support the new posting logic.
- Customer project w/o sales integration won’t support the new posting logic.
- Handling of variable considerations is not handled by the system with initial scope.
- For not supported business scenarios or aspects customers can opt for calculating the IFRS15/ASC606 impact outside the system and enter cumulative adjustment postings with SAP Business ByDesign standard means (Journal Entry Voucher).
Considerations for implementation
Already existing sales orders / sales contracts at activation of enhancements (like started, partially delivered sales orders or customer contracts) cannot be handled by the enhancements. Only new ales orders and customer contracts are enabled for the new capabilities after the activation. Customers must clarify with their respective auditor how to handle the ‘started’ objects in a transition phase.
It is strongly recommended to activate the SAP Business ByDesign enhancements only after the customer initiated a change project which covered:
- Business scenario identification and change management with sales and financial department.
- Software and related change management.
- Concept and agreement with auditor how to deal with the situation during the transition phase and in case variable considerations are to be handled outside the SAP Business ByDesign system.