Since its initial publication in 2014, the IFRS 15 standard has encouraged businesses to recognize and report all revenues originating from customer contracts in coincidence with the fulfilment of the related commitments to their customers. The standard brings forth the promise of a more consistent, comparable and comprehensible view of the company and its revenue flows in the financial statements. On the other side of the coin, however, lurks the hazard of more complex accounting practices. This article seeks to demonstrate how SAP’s Revenue Accounting and Reporting (RAR) add-on could offer a remedy for SAP S/4HANA systems and SAP ECC systems starting from release 6.05.
The IFRS 15 standard
IFRS 15 applies to all customer contracts from 2018 onwards, which concern the delivery of goods and services in standard business practice. Only a select number of exceptions are recognised, e.g. for leasing contracts within the scope of IAS 17. The goal is to put forward a unique revenue recognition concept across all sectors and industries.
This revenue recognition concept is built around five steps:
- the identification of customer contracts, as defined by IFRS 15
- the identification of all included commitments to the customer (‘performance obligations’ (POBs))
- the determination of the contractual price of the obligations (‘transaction price’)
- the allocation of the total transaction price to the different performance obligations, based on their fair value price (‘standalone selling price’ or SSP)
- the recognition of the allocated price as revenue, upon fulfilment of the performance obligation
Aside from the five-step revenue recognition model, the standard also provides regulations concerning, for example, contract modifications and combinations.
Read more information on the exceptions to IFRS 15 and the standard’s definition of contracts and performance obligations.
Known challenges of IFRS 15
Challenges during the implementation of IFRS 15 can, to a large degree, be traced back to the scope and theoretical intricacy of the standard. By uniting several legacy standards, IFRS 15 lowered the ambiguity of conformable revenue recognition and reporting, yet also increased its overall complexity in both application and understanding. Mainly small to medium-sized companies, companies that deal with complex offerings, or companies that frequently engage in long term contracts with their customers, experienced a significant impact on their processes, systems and financial reporting. Examples of affected businesses chiefly reside in the telecom, health care and construction industries. Experienced difficulties vary, but namely centre around the concept and identification of performance obligations or the regulations surrounding contract combination and modification.
Furthermore, the more detailed and comprehensive disclosures of IFRS 15 created new demands on data capturing and analysis processes. For instance, the introduction of performance obligations and contract balance movements reports meant that a new level of data had to be identified, compiled, integrated or stored. It is often difficult for companies to predict what additional data will be required and whether their IT infrastructure will be able to meet the brief.
Finally, neither the internal nor the external environment of a company is static. As a business’ practises and circumstances adapt; so must its IFRS 15 implementation.
The RAR add-on as SAP's solution
The SAP RAR add-on serves as a facilitator and automator of a revenue accountant’s tasks. It assists the user in complying with various accounting standards and guidelines, including IFRS 15. Compared to SAP SD’s original interpretation of revenue recognition, some of its improvements include the allowance of parallel accounting, the synchronisation of cost recognition with revenue recognition, and the availability of various new, compulsory disclosures (e.g. reports showing the disaggregation of revenues by different categories, contract balance movements and upcoming revenues expected for outstanding POBs). SAP RAR transactions can be executed in the GUI, in Fiori and on NetWeaver. The add-on is available for SAP ECC systems (minimum prerequisite is release 6.05) and SAP S/4HANA systems.
To achieve its goals, RAR can be integrated with various source applications from which it will obtain details on order creations, modifications, invoices and deliveries (Step 1 in Figure 4). Possible source applications include both SAP software (SAP SD, CRM or Hybris) and third-party applications. Beforehand, it should be configured which document types and item categories are considered to be relevant for revenue accounting, and should therefore be moved to the SAP RAR environment.
Figure 2: Upon creation of a document in SD which is defined to be relevant to RAR (1), a set of Revenue Accounting Items is created (2), one for each order item and one for each billing plan invoice. After processing these items in the ‘RAI Monitor’ (transaction FARR_RAI_MON), a matching RAR contract is created (3) according to predefined BRF+ decision rules (4).
The transmission to RAR occurs through a set of Revenue Accounting Items (RAI), which will automatically create and update revenue contracts and performance obligations based on a set of decision rules (Steps 2 and 3 in Figure 4). The decision rules are predefined in the SAP Business Rule Framework plus (BRF+) and assign a company’s goods and services to the equivalent performance obligation types. They will moreover provide all necessary performance obligation attributes (e.g. start date, duration) and, as explained below, will stipulate one of three fulfilment types: event-based, time-based or percentage of completion.
As the name suggests, a performance obligation’s fulfilment type dictates how and when a contractual commitment will be satisfied (Step 4.1 in Figure 4). Event-based fulfilment indicates that the obligation to the customer is met upon execution of a specific action (e.g. goods issue, posting of an invoice). Time-based fulfilment causes revenues to be recognised throughout a given time, following a specified deferral technique (e.g. linear distribution). Percentage of completion fulfilment requires the user to manually record any developments in the fulfilment of a commitment to a customer.
For all performance obligations, invoices can be posted before, after or concurrently with their fulfilment. Similarly to sales orders and contracts, all invoices will be moved to SAP RAR via Revenue Accounting Items (Step 4.2 in Figure 4).
Subsequently, the user can periodically create revenue postings for one or more contracts to both the general ledger and corresponding ledgers (Step 5 in Figure 4). This is typically carried out during the closing of an accounting period. Considering each performance obligation’s fulfilment type, the fulfilment transactions and events that have thus far occurred, and the invoices thus far recorded, all relevant postings can be simulated and created. The calculation of contract assets and contract liabilities is performed in a predecessor program. Contract assets are revenues that are recognised but not yet invoiced, whereas contract liabilities make up the opposite category. Based on system configurations, contract assets and liabilities calculation happen at the level of either the contract or its performance obligations. When traditional GAAP requirements should equally be attended to, unbilled and deferred revenues can be determined as well. For all postings, general ledger account determination occurs based on a collection of BRF+ decision tables.
SAP RAR furthermore facilitates various additional faculties, such as cost recognition, right of return, contract modifications and contract combinations.
- Firstly, cost recognition can be activated for any chosen POB type. Non-accrued costs of goods sold are then regarded as planned costs and are only recognised upon fulfilment of the POB.
- Next, a right of return can be assigned to any distinct performance obligation with event-based fulfilment. The percentage of sales which is expected to be refunded is then deducted from the revenues and recorded as a refund liability. This posting will be reversed upon the expiration of the return privilege.
- Thirdly, alterations to the contract price, scope and characteristics result in either a retrospective or a prospective change, depending on the underlying business rules. A retrospective change constitutes changes to both fulfilled and unfulfilled parts of the contract (cumulative catch-up and altered future revenues). A prospective change affects only the unfulfilled parts of the contract (altered future revenues).
- Finally, it’s possible to combine two or more related contracts that are entered at or nearly at the same time, with the same customer. A single source contract comprising all POBs will remain, while the other contracts will be deleted.
If you have any questions about RAR, do not hesitate to request more information or leave a comment in the comments section below.