IFRS15 / ASC606 Case: Dealing with Sales Bundles

[thomas_meder]

SAP introduced enhancements to SAP Business ByDesign to allow customers to comply with accounting standard IFRS15/ASC606 revenue recognitions requirements. A series of case documents introduces the key requirements of IFRS15 /ASC606 along with steps to be taken by the client to implement the functionality.

There are many ways customers can handle and represent bundled agreements. Consequently, we have encountered many questions on how this can be handled in an IFRS15/ASC606 context. Therefore, we at SAP Business ByDesign would like to share a way of modelling the business requirement.

In this document we purposely use the term ‘sales bundles’, so as not to confuse it with the SAP Business ByDesign Sales Kits. As mentioned in this blog, (see limitation section) sales kits are currently not supported for revenue recognition.

Business Scenario - Introduction

The company Printing Solution Ltd sees an opportunity to sell into the midsize market with a bundled offering with a single attractive price for the bundle: 105.000, - USD

Print Starter Bundle consisting of:

• 1 ea Printing Machine


• 1 ea Paper Feeder


• 1 ea Installation Service


• 4 ea Ink Black 1000 l / 1 ea delivered quarterly

If items were sold not in a bundle

If the items of the bundle were to be sold standalone the sales order would look like this with a total transaction value of: 121.000, - USD after taking regular discounts into consideration.



Printing Solution Ltd would like to sell like this:

Questions arising from IFRS15/ASC606

Typical questions arise from IFRS15/ASC606:

• 
  
  
  
  • Question: What are the performance obligations (POB)?
    Answer/assessment by Printing Solutions Ltd: Every item below represents a POB.
    The item representing the bundle is an item for invoicing. It needs to be treated as a POB to be incorporated into the allocation.
  
  
  • Question: What is the standalone selling prices (SSPs) for the POBs?
    Answer/assessment by Printing Solution Ltd: The SSP can be taken from an order without bundle. The bundle item itself is technically a POB to be part of the RAC and allocation but only represents an item used for invoicing. So, the Print Starter Bundle’s SSP will be 0,00 USD.
  
  
  • Question: What is the transaction value of the Revenue Accounting Contract?
    Answer/assessment by Printing Solution Ltd: 105.000, - USD
  
  
  • Question: When is revenue on the POBs (items) to be realized?
    Answer/assessment by Printing Solution Ltd: see assigned accrual methods on items
    The item representing the bundle could have the accrual method ‘Reverse Accruals and Deferrals’. Since its SSP and the allocated amount are 0,00 USD, revenue will not be realized on this item. Technically an accrual method has to be assigned to assure it is part of the allocation.
  
  
  
  Summary below: the red columns refer to the IFSR15/ASC606 relevant aspects
  
  
  

  Proposal, how this business scenario could be modelled in SAP Business ByDesign

  
  

  Master Data

  
  
  
  
  • Product: The Print Starter Bundle a service product with the item type ‘service without actuals’ could be used.
  
  
  • Price and Discount Lists: To ensure the SSP is derived from price determination it is recommended to maintain:
    
    
    
    1. price list: Print Starter Bundle = 105.000,00 USD
    
    
    2. discount list: Print Starter Bundle = 100%
    
    
    
    This results in the SSP for Print Starter Bundle being defaulted as 0,00 USD. The ‘regular’ items should have regular pricing applied to default their respective SSP’s and the regular discounts applied (if any).
  
  
  • In the business configuration finetuning activity ‘Accrual method determination’, it should be assured that the products have the correct accrual methods so they are defaulted correctly.
  
  
  
  

  At sales order entry

  
  While entering the bundle only discounts now need to be manually adjusted:
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

  Item	Product	Pricing Default	Manual Change
  10	Print Starter Bundle	100%	0%
  20	Printing Machine	0%	100%
  30	Paper Feeder	0%	100%
  40	Setup and Installation	0%	100%
  50	Ink Black	0%	100%

  
  
  
  After the sales order has been released the revenue accounting contract (RAC) exactly represents the desired allocation amounts.
  
  
  
  Revenue Accounting Contract (RAC) showing the allocation amounts:
  
  
  

  Sales Order Processing, Invoicing and Fulfillment

  
  It is not intended in this case document to run through the entire fulfillment process or to show step by step financial implications.
  
  Assumption: Print Solutions Ltd has agreed to issue the invoice upfront
  
  
  
  • Step 1: In the Sales Order, item 10 Print Starter Bundle has been set to ‘completed’.
  
  
  • Step 2: An invoice request has been issued.
  
  
  • Step 3: The Invoice has been created
  
  
  • Step 4: Deferred Revenue – Check report. At this point of time the invoice affects ‘Deferred Revenue’
  
  
  • Step 5: Execute Revenue RecognitionIt is expected that since no performance obligation (in this scenario item) has been fulfilled the revenue recognition will lead to contract liabilities.
    
    
  
  
  • Step 6: ‘Fulfilment’ of Setup and Installation (POB fulfilled)
    
    
    
    • Assume the Setup and Installation are recorded to be completed
    
    
    • Now labour times are recorded and lead to deferred cost of goods sold
    
    
    
    
    
    
  
  
  • Step 7: Run Revenue recognition again after fulfilment of POB ‘Setup and Installation’Now we expect the allocated amount for this performance obligation to be realized.
    The remaining portion stays on contract liabilities.
  
  
  
  Here we end the step by step illustration of the process.
  
  So, with further fulfilment of the other performance obligations their respective allocated amounts based on the completion derived by the accrual method will be realized.
  
  NB: Feedback on this scenario is always welcome. Have you modelled the business requirement differently? If you have. Please share.