This blog starts with explaining a reporting issue faced in some given scenarios. And then in general will explain the possible solution. In the later part will see how SAP Result Analysis addresses these issues and provide some basic configuration details relating to Result Analysis.
Let’s start with a scenario where in REV Ltd., a construction company gets into a customer project to build a plant. Terms of the contract are as below;
- The contract is of 10 million. Which means REV Ltd. gets revenue of 10 million from the contract.
- Invoice of 5 million will be raised at the beginning of the contract and the remaining 5 million will be raised upon completion of the contract which is after 4 months.
REV Ltd. has estimated that it would cost 8 million to complete this project. It means a profit of 2 million (i.e., 25% profit on the cost).
An investor looking at the above financials at the end of period 1 with no other details, finds the business to be highly profitable and may take a wrong investment decision.
Even when we look at the financials throughout the contract period, anyone will certainly interpret the business to be highly volatile and risky, though it is not as it looks by numbers.
To overcome the scope for interpretation and to keep a more stable and appropriate profit and loss statement, it requires adjustment in the reporting revenue or corresponding costs (as the case may be) in each period. In most cases, this exercise is also required to get complied with accounting regulators/standards.
So, how do we do this?
Indeed, there are multiple approaches. An appropriate one can be picked based on the nature or the business, internal policies, available information, regulations or any other influential aspects. Nevertheless, for our discussion and understanding we will limit our self to below two approaches;
1. Percentage of Completion Method (POC) – Cost Based
Under this method;
- Calculate POC of a project based on how much has been already spent on the project in comparison with the planned cost, i.e., POC = (Actual Cost/Planned Cost) * 100
- Recognize revenue only to the extent of POC, i.e., Calculated Revenue = Planned Revenue * POC
- If there is difference between Actual Revenue and Calculated Revenue, it must be adjusted.
When Actual Revenue > Calculated Revenue (Revenue Surplus), then reduce the revenue.
When Actual Revenue < Calculated Revenue (Revenue in Excess of Invoiced), then increase the revenue.
- There will be no change in reported cost.
2. Revenue Based Method
Under this method;
- We keep revenue as it is; but do adjust the expenditure/cost to bring it in proportion to revenue.
- Calculated Cost = (Actual Revenue/Planned Revenue) * Planned Cost
- If there is difference between Actual Cost and Calculated Cost, it must be adjusted.
When Actual Cost > Calculated Cost (Work in Process), then reduce the cost.
When Actual Cost < Calculated Cost (Reserves for Unrealized Costs), then increase the cost.
- There will be no change in reported revenue.
Now with adjusted financials as above under both approaches, profit is evenly distributed over the period and business doesn’t look volatile and risky. This is also called as principle of matching cost and revenue or ‘matching principle’.
In SAP, the ‘Result Analysis’ feature helps in automatically calculating and adjusting the financials as above.
3. SAP Result Analysis
In SAP, a project is created with required Work Breakdown Structure (WBS) for each customer project. Planned cost and revenue of the project is also maintained. All expenses relating to the project are posted on WBS (cost object). Revenue relating to the project is also posted from SD (billing) on the WBS. (It is to be noted that when revenue is posted on WBS, COPA documents are not generated.)
During period end, Result Analysis (Transaction KKA2) is performed on the project to match cost and revenue. It is performed at WBS level while it considers all the sub level WBS and Network Activities under it. To calculate and propose accounting adjustment entries as per matching principle, Result Analysis considers various data like planned cost, planned revenue, actual cost, actual revenue, method to be used to match cost and revenue, and GL accounts to be posted. Result Analysis does not post any accounting entries. The calculated results should be saved to get considered for settlement run.
The next step is Settlement (Transaction CJ88) of the project. Settlement of the project happens based on the settlement rule assigned. Normally in case of customer projects, settlement happens on COPA. Settlement will post settlement accounting entries as well as result analysis entries.
Let’s try to understand some of the important configuration which help Result Analysis work.
Maintain Result Analysis Keys (Transaction OKG1)
Result Analysis Key (RA Key) is a control parameter for Result Analysis. It is assigned to a WBS. When a RA Key is present in WBS it becomes Result Analysis relevant. The method assigned to RA Key will be considered when Result Analysis is executed.
Define Valuation Methods for Results Analysis (Transaction OKG3)
Valuation Method specify the method by which results analysis is carried out. Whether it is Cost-Based POC Method or Revenue-Based Method or so on. It is assigned to RA Key in combination to controlling area and RA Version.
Valuation Method can be assigned in Simplified Customizing or in Expert Mode. With Expert Mode lot of settings can be made in the valuation method. It is recommended to user Expert Mode only when necessary.
Below is the list of Result Analysis Methods available in SAP; (More details on Results Analysis Methods can be found in SAP Help)
Define assignment of Cost Elements (GL Account) for Results Analysis (Transaction OKG5)
Cost Elements are assigned to Line IDs defined. Line IDs structure the results analysis data according to the requirements of Financial Accounting. Postings to these cost elements (GLs) will be considered for actual data (cost and revenue) while calculating result analysis.
Define Posting Rules for Settlement to Accounting (Transaction OKG8)
This configuration helps us to define the GL accounts which needs to be posted as part of result analysis adjustments upon settlement. For example, GLs for Revenue in Excess of Invoiced or Reserves for Unrealized Costs. Result Analysis Category is the key for account determination. It is defined with origin of Result Analysis data. For Ex. RA Category POCI (Revenue in Excess of Billings) is referred for posting when calculated Revenue in Excess of Billings.
This configuration is maintained mainly in combination of CO Area, Company Code, RA Version and RA Category.
Hope you find the blog helpful. The intention of this blog is to give an overview of the Result Analysis concept. Result Analysis has lot of methods and options and please do further reading to know and utilize the full potential of Result Analysis.