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Author's profile photo Ling Zeng

Early Warning Mechanism for Standalone Selling Price Compliance Risks

Today we would like to share with you the power of automating compliance rules by using SAP Financial Compliance Management in conjunction with Revenue Accounting from SAP.

You may be wondering, how is this relevant for Revenue Accounting? Well, revenue recognition policies provide exhaustive rules, which revenue accountants need to comply with. This dynamic environment is further fueled by new and evolving business models alongside a general trend from fixed product sales to long-term subscriptions along and with usage-based monetization structures. The need for automating financial compliance in revenue accounting is prevalent.

This blog simply provides an overview for how the validation of the standalone selling price (SSP) can be automated in SAP Financial Compliance Management. SAP Financial Compliance Management is a cloud solution built on SAP Business Technology Platform and requires a separate license. The standalone selling price (SSP) is the price at which the entity would sell a promised good or service separately. Revenue Accounting allocates the contractual prices to performance obligations in proportion to their standalone selling prices. You can review the allocation result using the Manage Revenue Contracts app in Revenue Accounting.

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Fig 1: Standalone Selling Price in Revenue Accounting

An entity must evaluate past transactions (or other evidence) to assess whether or not a reasonable range of prices exists. For example, a reasonable range of prices encompasses at least 80% of the separate sales of an element. Additionally, the lowest and highest price in the range do not vary more than 15% from the standard SSP in the range. The standard SSP is the most frequent value of the SSPs in the transactions. This is where the new automated rule for the SSP compliance control kicks in.

SSP compliance control compares the transaction prices that were charged with the reasonable SSP range for variable time periods, such as the previous four quarters. The control aspect validates SSP compliance not for individual performance obligations, but for each performance obligation name in Revenue Accounting. Multiple performance obligations can be created with the same performance obligation name. You can check the SSP compliance to evaluate whether the correct SSP is applied to the underlying product/service for the allocation of the transaction prices in multiple element arrangements (MEAs). Multiple element arrangements are transactions with one customer which are jointly negotiated; they are viewed as one business transaction from an accounting perspective. In Revenue Accounting, it identifies a revenue contract that contains several performance obligations.

Why did we choose the new SAP Financial Compliance Management from SAP to build these automated rules?

Financial Compliance for revenue recognition aims to automate the detection of outliers which fall outside the reasonable SSP range in the SSP test and accelerate issue analysis and resolution. To support an early indication mechanism when pricing deteriorates (e.g., drift away from the standard SSP price), thresholds can be provided in SAP Financial Compliance Management to trigger a workflow. Once a non-compliant SSP occurs, meaning that the SSP compliance is lower than the pre-defined threshold, an alert is triggered. Your corporate finance group can then react by either re-setting the SSP or tightening deal approvals and controls.

This closed loop of setting up rules, running periodically detection controls and investigating the findings and optimizing the rules you can now apply to further controls either in revenue accounting or generally in financials based on a common framework. 

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Fig 2: Process Flow – Standalone Selling Price Compliance Risks

Now back to the details of the specific rule for the standalone selling price control 

So how are the standalone selling price compliance risks identified in Financial Compliance, well, it’s a step-by-step process.

Set-up Data Source

You may wonder why we have to connect data sources. We want to not only use Financial Compliance as a general control framework for the purpose of Revenue Accounting, but potentially also beyond. Tax rules, accounting rules, and more is possible. As a result, these controls were not natively built into Revenue Accounting but for use as a general framework with all the benefits that come along with that. This includes applying a wide range of other automated controls in revenue recognition and beyond.

Where you can find the best practice content of SAP Financial Compliance Management about the data source? The answer is easy: You will find it directly in your customer system in the Manage Automated Procedure app. Obviously, you would still have to enter, for example, your SAP S/4HANA Cloud backend system etc., but apart from that, it’s ready to use.

The data source of the standalone selling price control is built based on the CDS views for performance obligations and change types. The pre-delivered OData Service for the standalone selling price can also be found in the best practice content.

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Fig 3: Manage Automated Procedure – Active Status

Design Controls

The next step is to create controls based on compliance requirements, risk assessment, etc. by using the Manage Controls app. You can find the best practice content of respective controls in SAP Financial Compliance Management as a draft version and adapt it to your needs. If you would like to know the control of standalone selling prices, you can check out the SAP Help Portal: Business Content for SAP Financial Compliance Management.

Of course, you are free to assign your automated procedure to the control itself, such as assigning all automated procedures of standalone selling prices to one control.

Create and Schedule Work Packages

Having covered the setup of rules, you now need to focus on executing of checking for compliance risks. You can create a work package specifically for the testing of the standalone selling price using the Manage Work Packages app. You are able to assign a set of controls and relevant procedures to the work package that is created. When a work package is executed, all included procedures are executed too. The execution of a work package can be set to recurring to enable continuous control monitoring. As a example, you could schedule the recurring run quarterly and audit the previous four fiscal year quarters for the standalone selling price control.

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Fig 4: Schedule Work Packages for Standalone Selling Price

Issue and Remediation Management

Last but not least, where can you analyze the non-compliant standalone selling prices? The Display Automated Procedure Runs app in SAP Financial Compliance Management provides a list of non-compliant items for your automated procedure. Only non-compliant standalone selling prices for each performance obligation name, whose SSP Compliance is less than the pre-defined threshold, are displayed. You can analyze the most critical deviations and these activities are handled by the compliance manager. You can see that 7 non-compliant issues are detected as their SSP Compliance values fall below the 80% threshold.

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Fig 5: Non-compliant Standalone Selling Prices per Performance Obligation Name

As an issue processor, you would like to classify the issues based on the pre-defined issue category and risk level, for example, as an exception, observation, and problem. You can set a conclusion such as Confirmed or False Positive and then set them to Completed after the issues have been resolved in the Process Issues app. This enables all non-compliant issues to be monitored in one place. What’s the prioritized result for the standalone selling price control, you may ask? Well, you are now able to review 3 non-compliant issues for standalone selling price control that are classified as High. This is because their SSP Compliances are less than 70%. All other non-compliant issues are classified as Medium.

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Fig 6: Non-compliant Issues with Issue Category and Risk Level

Then how to prioritize the issues by defining the issue category and risk level?

You can prioritize issues in the Manage Rule Projects app, which will help you recognize the issue types in the Process Issues app.

  • The Issue Category classifies issues. For example, you can classify the standalone selling price controls as SOX compliance (The default value is Other).
  • The Risk Level indicates the priority of an issue. This enables compliance specialists to work on the important issues first. For example, for standalone selling price controls, compliance risks can be identified as Highif the relevant SSP Compliance is less than 70%, whilst others are identified asMedium. 

Note: The issue category and the risk level are set automatically based on the configuration settings. You have the option to change the configuration in order to the issue category or the risk level according to your business needs.

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Fig 7: Business Rules Definition for Standalone Selling Price controls

Additional Information

SAP Help Portal Revenue and Cost Accounting:

https://help.sap.com/viewer/89d896ca9cd64318b1667df5ec00e4b2/latest/en-US/c7ce61533be7ff4fe10000000a44176d.html

SAP Help Portal SAP Financial Compliance Management:

https://help.sap.com/viewer/product/FINANCIAL_COMPLIANCE_CF/latest/en-US

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