IMPROVING REVENUE RECOGNITION TO ENHANCE PERFORMANCEBEST PRACTICES FOR THE HIGH-TECH INDUSTRY

SAP Thought LeadershipRevenue Recognition and Analytics

With the right software, you can automate enough of the more-objective parts to increase data accuracy and visibility, help ensure compliance, and compare actual and forecast revenue against budget targets. An analytics-led approach can also help you perform what-if scenarios and root-cause analysis, identify and address unrecognized revenue, reduce the cost of revenue recognition, and improve the efficiency of your revenue-recognition process.

4 Executive Summary

5 Today’s Challenges in Recognizing and Analyzing Revenue

5 Complex Financial and Regulatory Standards

5 Internal Inefficiencies 6 Sales Arrangements with

Multiple Elements 7 Effective Revenue Recognition

for High-Tech Firms 8 Applying SAP Solutions to

Revenue Recognition 8 Sales and Revenue-Recognition

Functionality 8 Consolidated Reporting

for Global Businesses 8 Automated Rules 9 Real-Time Revenue Data

at Your Fingertips 9 Dashboard Simplicity 9 A Comprehensive Picture

of Revenue 9 Find Out More

CONTENT

The accurate recognition of revenue is particularly important during times of economic uncertainty and low liquidi-ty, when companies are under greater pressure to optimize cash flow. Howev-er, better visibility into revenue streams can improve decision making at any time and can help you capitalize on opportunities for recognizing revenue as soon as possible. In addition, such visibility can give you greater insight into and control over your business as a whole. The accurate recognition of revenue is also important for the analysts and investors who keep close watch over the earnings that compa-nies report.

Recognizing revenue – particularly in the high-tech industry – is seldom as simple as adding up your cash receipts at the end of the day. A long list of reg-ulations and accounting practices gov-

ern how businesses recognize revenue under different scenarios. Many of these standards are subject to multiple interpretations and constant change. Similar challenges apply to the practice of contract manufacturing in the aero-space and defense industry, ongoing projects for professional services firms, and collaborative research agreements between biotech and pharmaceutical companies.

Given this complex maze of reporting standards, calculating the right revenue number at the right time isn’t easy. Automating your revenue-recognition processes with the proper software solution can assure the more timely and accurate calculation and reporting of revenue. It can also enhance com-pliance and prevent catastrophic restatements that may trigger dramatic shifts in stock value. Enriching this sup-

port with robust analytics can provide the insight and actionable information you need to maximize business performance.

EXECUTIVE SUMMARYGREATER ACCURACY AND INSIGHT THROUGH AUTOMATION AND ANALYSIS

Revenue represents an inflow of assets that results from selling a product or service. Revenue recognition occurs when the proceeds from a sale are formally recorded in a company’s accounts or financial statements.

Timely Answers to Your Revenue-Related Questions

Revenue questions come up constantly during the course of any business day: • How does our revenue compare with

our budget? • What regions are generating the

most (or the least) revenue? • Which customers have the most

unrecognized revenue? • Is there deferred revenue that we

can recognize today?

• What is the deferred-revenue projection for the next 12 months?

Answering these questions quickly and accurately requires an analytics-based approach.

In addition, there are several methods for recognizing revenue – such as reve-nue earned over time using a straight-line basis – that can be applied to main-tenance and support contracts. For other types of projects and contracts, companies may recognize revenue on the basis of a percentage of project completion.

The International Accounting Standards Board and the U.S. Financial Account-ing Standards Board are jointly devel-oping consistent concepts for revenue recognition and general standards based on those principles. The new standards would replace revenue-recognition rules under the International Financial Reporting Standards (IFRS) and U.S. GAAP. A proposed road map for the new standards was released at the end of 2008. However, the timing for their implementation is still uncertain.

Internal Inefficiencies

Internal inefficiencies, including a heavy reliance on manual processes, can also reduce a company’s ability to recognize revenue accurately. Surveys indicate that most companies still process their revenue data using multiple spread-sheets. In addition to increasing the risk of error, the use of spreadsheets can be very labor and cost intensive.

To make matters worse, relevant sales and revenue data is often scattered across various silos throughout the organization. This may make it difficult to trace sales contracts, transactions, and accounting or support quick, data-driven decisions that improve profitability.

A variety of factors can make revenue recognition and analysis more difficult. The composition of revenue-generating transactions or sales agreements can vary significantly within a single firm, for example. Add to this a plethora of financial and regulatory standards that are highly complex and changeable.

Meanwhile, many companies struggle with internal inefficiencies related to recording and recognizing revenue and with poor communication among their sales, finance, and accounting teams about special terms and conditions. The accuracy, visibility, and timeliness

of their revenue data often suffers as a result. The high-tech industry faces an additional challenge due to its use of bundled sales agreements – in which software, hardware, maintenance, and services are grouped in a single deal.

Complex Financial and Regulatory Standards

Complying with multiple revenue-recognition standards is a major chal-lenge for global companies. The coun-tries with which you do business may have different regulations, and individu-al lines of business and services may use different revenue standards.

Automating your revenue-recognition processes with the proper software solution can assure the more timely and accurate calculation and reporting of revenue. It can also enhance compliance and prevent catastrophic restate-ments that may trigger dramatic shifts in stock value. Enriching this support with robust analytics can provide the insight and actionable information you need to maxi-mize business performance.

TODAY’S CHALLENGES IN RECOGNIZING AND ANALYZING REVENUE COMPLIANCE AND INEFFICIENCY

5SAP Thought Leadership – Improving Revenue Recognition to Enhance Performance

Another problem is the lack of com-munication between a company’s sales and accounting departments. If accounting has limited influence over special terms and conditions in a sales contract, it also has limited influence over the profitability of that contract.

In addition, many companies try to meet period-end sales targets with a flurry of last-minute contracts. If the accounting department cannot process these contracts before the period clos-es, revenue from the contracts cannot be posted in a timely manner. Global trading and currency conversion can cause further difficulties in recognizing revenue.

Sales Arrangements with Multiple Elements

Sales agreements that bundle soft-ware, hardware, maintenance, and professional services are increasingly the norm in the high-tech industry. Such multiple-element sales create

unique challenges in revenue recogni-tion. Accurate revenue recognition under these arrangements requires the complete understanding and application of all terms and conditions for each element of a contract.

Under these arrangements, revenue is allocated to each element based on vendor-specific objective evidence (VSOE), when available, and can be recognized only when specific revenue-recognition criteria for each element are met. Even elements such as can-cellation rights, upgrades, and mainte-nance contracts – whether offered free or at a discount – must be allocated as revenue based on VSOE. If VSOE is not available for an element, the timing for recognizing the entire sales bundle is impacted. Since VSOE does not always equate to the list price, a com-pany must have historical evidence to substantiate the fair market value of each deliverable. It must also reassess these values over time.

Sales agreements that bundle software, hardware, maintenance, and professional services are increasingly the norm in the high-tech industry. Such multiple-element sales create unique challenges in revenue recognition. Accurate revenue recognition under these arrangements requires the complete understanding and application of all terms and conditions for each element of a contract.

6 SAP Thought Leadership – Improving Revenue Recognition to Enhance Performance

Because revenue recognition involves significant judgment and interpretation, it would be difficult to automate this process completely. With the right soft-ware, however, you can automate enough of the more-objective parts to increase data accuracy and visibility, help ensure compliance, and compare actual and forecast revenue against

budget targets. An analytics-led approach can also help you perform what-if scenarios and root-cause analy-sis, identify and address unrecognized revenue, reduce the cost of revenue recognition, and improve the efficiency of your revenue-recognition process.

The ideal software solution should support multiple methods for revenue recognition – including time-, event-, and project-based recognition – and should make a clear distinction between revenue recognition and invoicing. For example, your company might invoice a customer for the total amount due from a service agreement at the time of delivery. The revenue from this transaction would be recog-nized on a pro rata basis at periodic intervals, as specified in the contract agreement.

The ideal solution should also system-atically account for time-based revenue according to the contract term. It should support revenue recognition triggered by events or milestones (such as proof of delivery or customer acceptance of an order). In addition, it should be able to calculate project-based recognition using a percentage-of-completion, time-and-materials, cost, or revenue method. It should be able to show values for contracts with bundled products, where revenue amounts are derived from the VSOE for each element.

From contract to execution of terms, the ideal solution should help you reduce the number of documents you handle, streamline the approval pro-cess, and eliminate the need for manu-al postings. There should also be reporting functions that improve visibili-ty into contracts, highlight multiple-element arrangements, track any changes made to contract terms, and provide insight into customer collection status.

The solution should let you track and report on contract authorizations and associated workflows, delivery dates, and historical contract pricing infor-mation to support VSOE calculations. It should also help you comply with national revenue-recognition require-ments, international accounting stan-dards such as GAAP and IFRS, and other regulatory rules such as the U.S. Sarbanes-Oxley Act. In addition, it should highlight any exceptions or errors so you can focus on contracts that need additional processing.

Finally, the solution should help you make the most of your revenue data. It should provide a holistic view of revenue, track key trends, and help you accurately forecast future revenues on the basis of deals in progress. It should provide drill-down functionalities for measuring time-dependent revenue potential by customer, region, line of business, or individual order. You should be able to access this infor-mation in a timely manner for critical business decisions and gain up-to-the-minute, role-based visibility into revenue-related key performance.

EFFECTIVE REVENUE RECOGNITION FOR HIGH-TECH FIRMSENSURING ACCURACY AND COMPLIANCE AS WELL AS INSIGHT

Business Benefits from Accurate Revenue Recognition

With robust support for revenue recognition and analytics, you can: • Increase revenue accuracy and

transparency • Gain a holistic view of revenue

positions • Improve revenue reporting and

forecasting• Access key performance indicators

and analytics from multiple sources • Help ensure compliance with local

GAAP and international accounting standards

• Reduce manual accounting processes

• Accurately predict deferred revenue streams

• Recognize revenue as soon as possible

• Make decisions based on validated revenue data

• Enhance risk and strategy management

• Reduce costs and increase productivity

Internal inefficiencies, including a heavy reliance on manual processes, can reduce a company’s ability to recognize revenue accurately.

APPLYING SAP® SOLUTIONS TO REVENUE RECOGNITIONAUTOMATE AND ANALYZE FOR BETTER BUSINESS PERFORMANCE

SAP offers comprehensive functionality for the recognition and analysis of revenue. This support can meet the specific needs of high-tech companies and improve compliance with local and international accounting standards. There is also support for analyzing revenue data and making the revenue-based decisions that are key to strong business performance.

Sales and Revenue-Recognition Functionality

The SAP® ERP application offers com-prehensive sales and revenue-recogni-tion functionality to help you integrate sales orders and contracts with reve-nue schedules. You can configure the application to meet specific company standards and accommodate various methods of revenue recognition.

Functions for time-based recognition define the revenue-recognition accrual period according to the sales or billing document. Amounts are automatically prorated for incomplete periods. Revenue recognition can also be triggered by events such as customer

acceptance and proof of delivery. In addition, the application supports project-based methods of recognition.

SAP ERP is flexible enough to recog-nize revenue before, during, or after invoicing and can track and audit deliv-ery and collectibility. The software takes into account all sales, delivery, and billing documents to calculate the correct available revenue amount and attribute it to the appropriate general accounts (such as revenue, deferred revenue, or unbilled receivables).

You can automate the calculation and recognition of revenue for each of the supported methods and automatically reflect in the revenue schedule all real-time changes in time periods or values made to the sales documents. There are flexible rules for determining how changes are applied and distributed to the revenue schedule. There are also flexible pricing options for supporting certain VSOE processes.

Consolidated Reporting for Global BusinessesSAP ERP includes built-in support for consolidated reporting that involves multiple countries to help you handle

multicurrency transactions and associ-ated foreign currency translations in the revenue-recognition account. A compression of financial postings is available for customers with high vol-umes of revenue-recognition transac-tions. This can improve system perfor-mance while providing traceability back to the sales document.

Comprehensive monitoring functional-ities help ensure that, despite the decoupling of billing and posting of revenues, all revenues that are billed to the customer are realized. The applica-tion provides monitoring on both the financial account level and the sales document level, with transactions to support automatic clearing of accrual accounts.

SAP ERP can also streamline prepara-tion of financial reporting in accordance with international accounting principles and provides multiledger accounting to support multiple accounting principles. You can automatically include the revenue-recognition process in the application’s financial period–close workbench to reduce the time for period-end close.

Automated Rules

The SAP Price and Margin Manage-ment application by Vendavo helps you set and automate rules for pricing and revenue recognition. VSOE compliance requires both the enforcement of com-mercial pricing rules and the automated allocation of revenue. This application helps ensure both that all approved prices are compliant with commercial and VSOE policies and that the right percentage of revenue is recorded.

The SAP ERP application offers comprehensive sales and revenue-recognition functionality to help you inte-grate sales orders and contracts with revenue sched-ules. You can configure the application to meet specific company standards and accommodate various meth-ods of revenue recognition.

8 SAP Thought Leadership – Improving Revenue Recognition to Enhance Performance

With the application, you can define and calculate guidelines for commercial pricing and revenue recognition. SAP Price and Margin Management then sends approved prices and VSOE val-ues to SAP ERP. Functions for profit analysis provide alerts for ongoing and exception monitoring of VSOE rates. Other functions help you enforce guidance and VSOE rules when the sales contract is negotiated. Real-Time Revenue Data at Your Fingertips

SAP BusinessObjects™ business intelli-gence solutions can help you make sound, data-validated business deci-sions and comply with prevailing rules and regulations by providing robust revenue-recognition analytics. You can leverage this functionality to minimize risk while improving your ability to max-imize revenue. You can combine these solutions with other SAP BusinessObjects software for an integrated view of risk and strategy management.

By combining data from SAP ERP and even non-SAP sources and delivering that information where and when it is needed, SAP BusinessObjects solu-tions can give you greater insight into and control over your revenue data. You can close the gap between defined business strategy and its day-to-day execution.

Dashboard Simplicity

With point-and-click data visualization supported by Xcelsius® software, busi-ness users can quickly access revenue data and KPIs through role-specific dashboards. You can embed these

dashboards in SAP ERP and a wide range of other environments to improve worker productivity.

Revenue data can be drawn through a secure, live connection and delivered in a customizable format that users define. You can connect your dash-boards and analytics to a wide range of SAP or non-SAP data sources or drill

down into SAP ERP and other reporting environments for more detailed information.

Dashboard visualizations are portable to facilitate collaboration and the shar-ing of information. Business users can capture them as documents, share them over the Web, incorporate them into Crystal Reports® software, and view them via a portal. Your entire organization gets up-to-date revenue information wherever and whenever users need it.

A Comprehensive Picture of Revenue

With at-a-glance visibility, revenue-recognition analytics give you an under-standing of your revenue situation from multiple perspectives. You can compare forecasts to actuals and view key revenue-related metrics such as days sales outstanding, profit margin, and year-to-date budget. You can also

view important revenue-recognition metrics such as deferred revenue and revenue backlog. Information is dis-played according to region, line of business, or time period.

Drill-down functionality lets you delve into revenue information for specific customers and analyze details at the order-line, contract, or material level.

Access to such information helps you integrate risk and strategy management into your day-to-day business activities, make decisions that capitalize on available revenues in a compliant manner, and improve your overall business performance.

Find Out More

Learn more about the many ways in which solutions from SAP can help your organization improve its revenue-recognition processes, capture more revenue, and improve compliance. Please contact your SAP represen-tative or visit us online at www12.sap.com/usa/solutions/sapbusinessobjects/large/industries/manufacturing/revenue-recognition/index.epx.

SAP BusinessObjects business intelligence solutions can help you make sound, data-validated business decisions and comply with prevailing rules and regulations by provid-ing robust revenue-recognition analytics.

9SAP Thought Leadership – Improving Revenue Recognition to Enhance Performance

10 SAP Thought Leadership – Improving Revenue Recognition to Enhance Performance

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