Sales Revenue Reporting compliant to IFRS15
Sugata Biswas
November 2017
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CONTENT
1. PURPOSE ............................................................................................................................ 3
2. IFRS15 REVENUE REPORTING REQUIREMENTS ...................................................................... 3
3. SYSTEM ARCHITECTURE AND SAP RAR DEPLOYMENT OPTIONS ............................................... 7
4. CONFIGURATION NODES ....................................................................................................... 8
4.1 GUI SETTINGS ..................................................................................................................... 9
4.2 BRF+ SETTINGS .................................................................................................................15
5 SCENARIO ILLUSTRATION .....................................................................................................18
5.1 NON-BUNDLED SALES .........................................................................................................18
5.2 BUNDED SALES ...................................................................................................................31
5.3 BUNDED SALES WITH BILLING PLANS .....................................................................................37
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1. Purpose
The purpose of this document is to demonstrate Sales Order Processing with revenue reporting compliant
to IFRS15 regulations. The configurations required in system to achieve this, using integrations between
SAP SD (operational system) and SAP RAR (Revenue Accounting and Reporting system) are discussed.
Some sales processing scenarios with IFRS15 compliant revenue postings are illustrated.
For the purpose of demonstration, following sales scenarios are included:
- Sale of service items with time related revenue recognition compliant to IFRS15
- Sale of stock items with event related revenue recognition compliant to IFRS15
Following sales scenarios have not been included in this document:
- Project Sales with Percentage of Completion based revenue postings
- Project Sales with cost-based revenue recognition
- Project Sales with revenue-based cost recognition
2. IFRS15 Revenue Reporting Requirements
IFRS 15 specifies how and when an IFRS reporter will recognize revenue as well as requiring such entities
to provide users of financial statements with more informative, relevant disclosures. The standard
provides a single, principles based five-step model to be applied to all contracts with customers.
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information
to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from a contract with a customer. Application of the standard is mandatory for annual
reporting periods starting from 1 January 2018 onwards.
IFRS 15 Revenue from Contracts with Customers applies to contracts with customers. The core principle
of IFRS 15 is that an entity will recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services.
This core principle is delivered in a five-step model framework:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
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- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Step 1: Identify the contract with the customer
A contract with a customer will be within the scope of IFRS 15 if all the following conditions are met:
- the contract has been approved by the parties to the contract
- each party’s rights in relation to the goods or services to be transferred can be identified
- the payment terms for the goods or services to be transferred can be identified
- the contract has commercial substance
- it is probable that the consideration to which the entity is entitled to in exchange for the goods or services
will be collected.
SAP Functionality
In SAP Revenue Accounting and Reporting (SAP RAR), Revenue Accounting can combine items from
different operational contracts from different operational applications in one Revenue Accounting
contract
The Revenue Accounting contract is the level for determination and allocation of the transaction price
Step 2: Identify the performance obligations in the contract
At the inception of the contract, the entity should assess the goods or services that have been promised
to the customer, and identify as a performance obligation:
- a good or service (or bundle of goods or services) that is distinct
- a series of distinct goods or services that are substantially the same and that have the same pattern of
transfer to the customer.
SAP Functionality
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The Performance Obligation is the level where the Standalone Selling Price (SSP) is defined, where the
price is allocated, and the fulfillment (PoC) determined.
Usually it corresponds to an item of an operational contract. But it can also be a combination of several
items, e.g., from a sales BoM (bill of material; or an implicit obligation, e.g., customer’s right for software
upgrade).
Step 3: Determine the transaction price
The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer
of goods and services. When making this determination, an entity will consider past customary business
practices.
SAP Functionality
The transaction price is determined from pricing conditions of the items in the operational contract. It
cannot be maintained within Revenue Accounting.
Step 4: Allocate the transaction price to the performance obligations in the contracts
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the
performance obligations in the contract by reference to their relative standalone selling prices. If a
standalone selling price is not directly observable, the entity will need to estimate it.
Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis.
SAP Functionality
The complete transaction price is allocated to the distinct POBs of a contract on a relative standalone
selling price (SSP) basis.
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Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Revenue is recognized as control is passed, either over time or at a point in time.
An entity recognizes revenue over time if one of the following criteria is met:
- the customer simultaneously receives and consumes all of the benefits provided by the entity as the
entity performs
- the entity’s performance creates or enhances an asset that the customer controls as the asset is created
- the entity’s performance does not create an asset with an alternative use to the entity and the entity
has an enforceable right to payment for performance completed to date.
If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time. Revenue
will therefore be recognized when control is passed at a certain point in time. Factors that may indicate
the point in time at which control passes include, but are not limited to:
- the entity has a present right to payment for the asset
- the customer has legal title to the asset
- the entity has transferred physical possession of the asset
- the customer has the significant risks and rewards related to the ownership of the asset
- the customer has accepted the asset.
SAP Functionality
Satisfaction can be a defined fulfillment event (e.g., goods issue) or over time
Over time fulfillment can be calculated time-based or based on PoC (Percentage of Completion)
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3. System Architecture and SAP RAR Deployment Options
Below is system architecture to integrate 5-step revenue recognition process for IFRS15 using SAP RAR.
Refer to SAP ERP as SAP S/4 HANA system on S4 HANA system landscape.
Below are deployment options:
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The SAP S/4 HANA Operational System and SAP RAR system may be disparate systems.
Alternatively in a simplistic architecture, both may exist on same system.
Below are the components of SAP RAR.
4. Configuration Nodes
Configuration includes setup within SAP RAR as well as integration of SAP RAR with operational systems
(SAP SD, SAP FI).
In this paper, both the operational systems (SAP SD, SAP FI) and SAP RAR are assumed to be on the same
box / client / system.
Detailed configuration steps and details are not captured in this document. Important settings and
integration points are covered.
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4.1 GUI Settings
(a) Integration of Operational System (SAP SD) with SAP RAR
Configuration needs to be maintained in below node for integration between SAP SD operational system
and SAP Revenue Accounting and Reporting (SAP RAR)
The RFC destination for SAP RAR is maintained under “Integrate with Revenue Accounting and Reporting”.
“Maintain Revenue Accounting Item Settings” is an important node and contains the sales transactions
relevant for revenue accounting that need to be passed to SAP RAR for revenue postings and reporting in
SAP RAR.
This is controlled by:
- Sales Organization
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- Sales Document type
- Sales item category
(b) SAP Revenue Accounting and Reporting (SAP RAR) settings
Following are the configuration nodes in SAP Revenue Accounting and Reporting (SAP RAR) within
Financial Accounting.
Revenue Accounting Item Classes are maintained. Subsequently interfaces are generated for these.
From Sales processing perspective, following Revenue Accounting Item Classes are used and interfaces
generated.
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Here the Source Document Item types, sender components and Logical systems from where SAP RAR
retrieves source data are defined.
Condition Type for Stand Alone Selling Price (which acts as basis for allocation of the transaction price for
revenue realization as per IFRS15) is defined. In this case, condition type ZSSP is defined.
BRF+ Application for SD Revenue Accounting Item Classes (SD01, SD02, SD03) is assigned.
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Structures that are used in BRF+ functions as input structures and Decision Table IDs for applications in
BRF+ are defined.
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Accounting Principle specific settings are defined.
Possible accounting principles are IFRS or GAAP.
IFRS15 uses Contract Asset and Contract Liability Account.
GAAP uses Unbilled Receivable and Deferred Revenue accounts.
The company codes are assigned to the Accounting Principles.
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For each combination of company code and accounting principle, a legacy data transfer date and a
migration status is assigned to indicate the date on which Revenue Accounting should be productive for
this combination. Migration packages may be used.
Revenue Accounting periods need to be open.
Number ranges for Contracts, Performance Obligations and Run IDs are defined.
Contract categories and Performance Obligation Types defined.
Performance Obligation type “ZMAINTAINC” is defined for time-based fulfillment of service or warranty
items.
Performance Obligation type “ZGOODSISSU” is defined for Goods issue event-based fulfillment of physical
goods / stock items.
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BRF+ Applications are assigned to the specific processes which require rule-based determination in
Revenue Accounting.
For Account determination, application Z_FARR_ACC_DETERMINE is used.
4.2 BRF+ Settings
(a) Performance Obligation Determination
Relevant entries are maintained in the Decision table under the application defined in customizing for
Performance Obligation(POB) determination.
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For stock item 3000000190, event-based POB ZGOODSISSU is maintained.
For Service / warranty item WARRANTY, time-based POB ZMAINTAINC is maintained.
(a) GL Accounts Determination
Relevant GL accounts are maintained in Account determination decision tables under application defined
earlier under customizing.
GL account for Recognized Revenue : 410020
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GL account for Receivable Adjustment : 121020
GL account for Revenue Adjustment for Allocation Effect : 410020
GL account for Contract Liability / Deferred Revenue : 290110
Contract Liability account is used as per IFRS15 regulations.
Deferred Revenue account is used as per GAAP regulations.
GL account for Contract Asset / Unbilled Receivable : 121100
Contract Asset account is used as per IFRS15 regulations.
Unbilled Receivable account is used as per GAAP regulations.
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5 Scenario Illustration
5.1 Non-Bundled Sales
This scenario discusses process of sale of service or warranty item, for which revenue is to be recognized
over the period of the contract (time-based revenue realization).
Sales Order is created for Sales organization, sales document type and sales document item category
combination set up for Revenue Accounting.
Contract duration is from 01.09.2017 to 31.08.2018
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Material “WARRANTY” set up for time-based POB determination (ZMAINTAINC) is used,
The transaction price is 1200 USD.
The Standalone Selling Price ZSSP is 1200 USD.
Invoice # 90000115 is created.
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Accounting document:
Sales invoice postings are to Normal Revenue Account 410020.
RAR processes
Order Item SD01 Table shows the sales order item as a Processable Item
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Invoice Item SD03 table shows the invoice item as a Processable Item
Following transactions are run to process items, transfer and post revenue in SAP RAR
(1) T-code FARR_RAI_MON
This is the Revenue Accounting Item monitor.
Processable Revenue Accounting Items can be processed using this.
Order Items
Order Item is processed.
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Revenue Accounting Contract # 1000000010 and POB # 1000000010 are created.
Order Item SD01 Table now shows Sales order item as a Processed Item
Invoice Items
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Invoice item is processed
Invoice Item SD03 table now shows Invoice item as a Processed Item
Revenue Accounting Contract along with Performance Obligation are created.
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Revenue Schedule is shown against the Revenue Accounting Contract.
Actual Revenue to be recognized over the Contract validity period is shown.
Amount for present month shows as recognized but not posted
Performance Obligation
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Since this is only item, the allocated transaction price is same as the total transaction price which is 1200
USD.
(2) T-code FARR_REV_TRANSFER
Using this t-code, program is run to transfer Revenue for the Revenue Accounting Contract.
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(3) T-code FARR_LIABILITY_CALC
This t-code is used to run program to calculate Liabilities and Assets for the Revenue Accounting Contract.
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(4) T-code FARR_REV_POST
Using this t-code, program is run to post Revenue against the Revenue Accounting Contract for the
present period.
Document # 100000038 has been posted to realize revenue for the present month
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Original revenue posted in Sales Invoice under GL Account # 410020 for the complete contract duration
has been reversed (Item # 6)
Revenue of 98.63 USD for present month has been posted (Item # 1) as per Revenue schedule.
The balance amount of 1101.37 USD has been posted under Contract Liability / Deferred Revenues
account 290110 (Item # 2). This shall get posted under Revenue account as per the Revenue Schedule
when program runs in the subsequent months.
121020 is the GL Account for Receivables Adjustment.
Revenue Schedule now shows revenue for present month as Posted.
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5.2 Bunded Sales
This scenario discusses Bundled Sales where a stock item is sold along with an associated
service/warranty. For the stock item, revenue shall be recognized at point of provision of service i.e. during
Goods issue, using Event-based revenue recognition. For the service item, revenue shall be recognized
over the period of the contract using time-based revenue recognition.
Sales Order is created with stock Item 3000000190 and Service Item WARRANTY.
Stock Item is set up for POB with event-based revenue recognition (ZGOODSISSU)
Service Item is set up for POB with time-based revenue recognition (ZMAINTAINC)
Contract duration is from September-17 to August-18
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Stock Item:
The transaction Price is 1200 USD
The Standalone Selling Price is 3600 USD
Service Item:
The transaction Price is 3600 USD
The Standalone Selling Price is 1200 USD
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Total Order value is 4800 USD.
The Stock Item is Goods issued and Sales Invoices are generated.
Invoice # 90000116 is for Finished Goods item
Invoice # 90000117 is for Service Item
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For both items, in invoice, posting is to normal Sales Revenue Account 410020. Entire revenue is realized.
RAR Processes
All RAR processes are carried out as in Section 5.1 with addition of processing the Fulfillment Item as well
in Revenue Accounting Item monitor using t-code FARR_RAI_MON
RA Contract # 1000000101 is created.
This contains 2 POBs:
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1000001001 – type ZGOODSISSU for Stock Item
1000001002 – type ZMAINTAINC for Service Item
Document # 100000040 is posted for Revenue accounting.
Original Revenue of 4800 USD posted in sales invoices is reversed (Item # 10)
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Based on allocation using the Standalone selling price, Revenue of 3698.63 USD is realized (3600 USD for
Stock Item + 98.63 USD for Service item) for September’17 as in Item # 3, 4 and 6.
The balance 1101.37 USD for warranty item is contained under Contract Liability / Deferred revenues
account (item # 2) and shall be posted to normal revenue account over the balance 11-month period.
Revenue Schedule for Stock Item shows as Revenue of 3600 USD posted.
Revenue Schedule for Service item shows as revenue of 98.63 USD posted.
Balance amount of 1101.37 USD shall be posted over 11 months.
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5.3 Bunded Sales with Billing Plans
This is similar to process in Section 5.2; however the Service Item is set up for a Billing Plan, where the
service amount will be billed monthly over the contract duration.
Contract validity is from September-17 to August-18
Stock Item:
The transaction Price is 1200 USD
The Standalone Selling Price is 3600 USD
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Service Item:
The transaction Price is 3600 USD, to be billed at rate of 300 USD per month over the year.
The Standalone Selling Price is 1200 USD which corresponds to rate of 100 USD per month over the year.
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Total Order value is 4800 USD.
The Stock Item is Goods issued and Sales Invoices are generated.
Invoice # 90000120 is for Stock Item (1200 USD plus taxes)
Invoice # 90000121 is for Service Item for monthly billing amount for September’17 (300 USD plus taxes)
For both items, in invoice, posting is to normal Sales Revenue Account 410020.
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RAR Processes
All RAR processes are carried out as in Section 5.2
RA Contract # 1000000102 is created.
This has 2 POBs:
1000001003 – type ZGOODSISSU for Stock Item
1000001004 – type ZMAINTAINC for Service Item
Revenue Accounting run for September’17 is carried out.
Accounting document # 100000041 is created.
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The original revenue of 1500 USD (1200 USD for Stock item + 300 USD for Service Item for 1st month)
posted in the 2 invoices is reversed (Item # 8)
Based on allocation using the Standalone selling price, Revenue of 3698.63 USD is realized (3600 USD for
Stock Item + 98.63 USD for Service item) for September’17 as in Item # 2, 5 and 6.
Since Customer has been billed only 1500 USD, the balance amount of 2198.63 USD is shown as Contract
Asset / Unbilled Receivables (Item # 9)
During subsequent monthly billings for warranty item, proportionate revenues would be getting posted
and amounts moving out from Contract Asset / Unbilled receivables account.
Revenue Schedule for Stock Item:
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Revenue Schedule for Service item:
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