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Revenue Recognition

The specific conditions under which income becomes realized asrevenue. Generally, revenue is recognized only when a specificcritical event has occurred and the amount of revenue is

measurable.

Income is recognized as revenue whenever the company delivers itsproduct or service and receives payment for it. However, there areseveral situations in which exceptions may apply

The revenue recognitionprinciple is a cornerstone of accrual accountingtogether with matchingprinciple. They both determine the accounting period, in which revenues and expenses arerecognized. According to the principle, revenues are recognized when they are realised orrealisable, and are earned (usually when goods are transferred or services rendered), no matterwhen cash is received. In cash accounting in contrast revenues are recognized when cash isreceived no matter when goods or services are sold.

!ash can be received in an earlier or later period than obligations are met (when goods orservices are delivered) and related revenues are recognized that results in the following two typesof accounts"

Accrued revenue" #evenue is recognized before cash is received.

$eferred revenue" #evenue is recognized after cash is received.

%A&'s revenue recognition functionality enables you to post the billing documents and recognizerevenue at different points in time. In the regular process, %A& recognizes revenue as soon as thebilling document is posted to accounting. The receivables account (customer account) and therevenue accounts are posted with this transaction. owever, certain business scenarios reuirerevenue to be recognized either before or after the invoice has been created. The revenue

recognition function provides a separate transaction (*+) to trigger the recognition of revenue.ere, two additional -/ accounts come into play" the deferred revenue and Accrued revenue(unbilled receivables accounts). If you bill the customer first and recognize revenue at a laterpoint, the amount is classified as deferred revenue in the interim. 0n the other hand, if thebusiness reuires you to recognize revenue periodically but bill the customer later, then theamount is 1ept in the unbilled receivables account.

%uppose you have to bill the customer first and recognize revenue later. ere's what will happen"

1. The billing document is posted" The receivables account and the deferred revenue accountare updated. Thus, you are billing the customer but not realizing the revenue yet.

2. The revenue recognition is posted" This offsets the deferred revenue account with therevenue account. The revenue recognition is thus completed.

Revenue Recognition Process

The revenue recognition process has several variations. To discuss the process flow, we'llpresent a simple example. %uppose a customer has purchased a one2year warranty from -alaxyfor a specific musical instrument. The customer has to be billed up front, but the revenue has tobe recognized on a monthly basis over the life of the contract. This is an example of time2basedrevenue recognition with up2front billing.

http://en.wikipedia.org/wiki/Accrual_accountinghttp://en.wikipedia.org/wiki/Matching_principlehttp://en.wikipedia.org/wiki/Matching_principlehttp://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Revenueshttp://en.wikipedia.org/wiki/Revenueshttp://en.wikipedia.org/wiki/Expenseshttp://en.wikipedia.org/wiki/Cash_accountinghttp://en.wikipedia.org/wiki/Accrued_revenuehttp://en.wikipedia.org/wiki/Deferred_revenuehttp://en.wikipedia.org/wiki/Matching_principlehttp://en.wikipedia.org/wiki/Matching_principlehttp://en.wikipedia.org/wiki/Accounting_periodhttp://en.wikipedia.org/wiki/Revenueshttp://en.wikipedia.org/wiki/Expenseshttp://en.wikipedia.org/wiki/Cash_accountinghttp://en.wikipedia.org/wiki/Accrued_revenuehttp://en.wikipedia.org/wiki/Deferred_revenuehttp://en.wikipedia.org/wiki/Accrual_accounting

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In this example, you'd set up a service contract in %A& specifying the start and end dates. 3ouwould also create a billing document with reference to the contract using *+45.

6hen it comes to revenue recognition, the system uses the contract start and end dates to createeual 7buc1ets8 in which the revenue will be recognized. If the customer is billed for 95,:44, therevenue recognized per period will be 9544 each, for 5: months.

The transaction that triggers the revenue recognition is VF44. 3ou can access it from SAP MenuLogistics Sales and Distribution Billing Revenue Recognition Edit Revenue List.The selection screen of VF44. In this case, we have specified the contract document number andthe posting period as the entire life of the contract. The details are displayed. The #evenues datais displayed in the upper window, and the !ontrol /ines data appears in the lower one. The!ontrol /ines record contains information such as the total value of the contract. The #ecog.#ev. field shows the total revenue recognized until date. ;nrec. #ev. is the balance, which is anunrecognized component. In this case, the customer has been invoiced for 95,:44. The revenuehas been deferred< hence, the unrecognized revenue is 95,:44.

Revenue recognition, post revenue selection screen

Revenue recognition wor list

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The #evenues list shows the revenue amounts that would be recognized in the selected postingperiod. %ince in this example we are chec1ing data for the entire life of the contract, we can see5: revenue buc1ets spread over the posting periods. The 3ear&er. field shows the posting periodand year. In every period, revenue will be recognized in eual amounts (9544). Thecorresponding -/ accounts appear in the list. In this example, suppose at the end of first period,the user selects the first line (for period :44=445) and clic1s !ollective &rocessing. Theaccounting document is generated, and revenue is recognized to the extent of the amount

specified.The accounting entries that are made at every step of the process.The amount billed (95,:44) is placed in the deferred revenue account. >ach month, a revenuerecognition entry is made for 9544. It updates the revenue account and offsets the deferredrevenue account. This process continues every period until the total revenue has beenrecognized.

Accounting view, de!erred revenue scenario"

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If there is a mista1e in recognizing revenue, you can cancel the entry using transaction VF4#"+ollow the path SAP Menu Logistics Sales and Distribution Billing RevenueRecognition Maintain $ancellation List %transaction code VF4#&.

3ou can derive a revenue report using transaction *+?. It lists all the details related to a givensales document. 3ou can chec1 all the revenue documents and cancellation documents that havebeen posted over a period of time. It is possible to display the accounting documents that havebeen created. 3ou can access this report using the path %A& @enu /ogistics %ales And$istribution illing #evenue #ecognition #evenue #eport (transaction code *+?).

This was a simple example of a revenue recognition process. There can be other variations aswell. +or example, you can use sales orders with billing plans instead of contracts. In this case,the billing plan dates control the revenue postings. Another variation is when the revenue is to berecognized before the customer is billed. !onsider the example of -alaxy's warranty. Avariation could be that the customer is not billed up front but instead billed uarterly, as per abilling plan attached to the contract. The revenue will be recognized in each period. At the end offirst period, revenue of 9544 is recognized, but it has not been billed yet. In this case, it updatesthe ;nbilled A# account. The accounting entries for this variation of the process.

Accounting view, unbilled A'R scenario

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Bow let's turn to service2based revenue recognition. In this case, the revenue recognition istriggered by a specific event, such as posting a goods issue. %uppose a customer has placed anorder with -alaxy for some musical instruments. As per the delivery schedule, some instrumentsare to be delivered in the first uarter of the year, and others in the second. The customer will besent a combined invoice at the end. 6henever a delivery is created and a goods issue is posted,you can trigger the recognition of revenue. This ensures that revenue is recognized in eachfinancial uarter, although the customer is billed at a later point in time.

Set Up Revenue Recognition

!onfiguring revenue recognition reuires close coordination with your finance team and %A&

+I!0 expert. %ince it is complex functionality, it is not open for configuration, and you have tocontact %A& through an 0%% message to get it activated. #efer to %A& %ervice @ar1etplace 0%%note CC=DEE for the initial activation. As discussed earlier, the +I!0 experts have to set up -/accounts to be used for deferred revenue and unbilled receivables. %A& %ervice @ar1etplace0%% note CCC==E provides detailed guidance on the setup of these accounts. 0nce this initialsetup is completed, you can proceed with the steps in the following section.

()Pefore you proceed with configuring revenue recognition functionality, please read the %A&%ervice @ar1etplace 0%% note 5:?E?:?. It contains a best2practice document andrecommendations from %A&. It also covers the process variations and flow diagrams. e advisedthat the content of the document is freuently updated, and new notes are often released. &leasesearch for the latest note number in 0%% %earch before proceeding.

Set Up Revenue Recognition for Item Categories

#evenue recognition is controlled at the ite* categor+level.

To create the settings, follow the path )M Sales and Distribution Basic Functions Account Assign*ent'$osting Revenue Recognition Set Revenue Recognition !or )te*

$ategories %-VEP&"

%elect the item category that you plan to activate, and go to the details screen. This screen withthe usiness $ata tab in it.

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Maintaining ite* categories !or revenue recognition

/et's loo1 at the fields in this screen"

Revenue Recognition In this field, specify the type of process you plan to use. In this field, youcan specify the revenue recognition category you are using, such as time2based or service2basedrevenue recognition. ere are the options to choose from"

(i*e.based revenue recognition %A& !hoose this option if your business scenario calls forrevenue recognition over a period of time, usually the length of a contract or the duration of aservice. The process starts with a contract document (or sales document with a billing plan). Inthis process, revenue is recognized in eual parts, over the duration of this contract.

Service.based revenue recognition %B& in this scenario, you carry out revenue recognitionbased on an event, such as rendering a service. The process starts with a contract or a sales order.As soon as a goods issue is posted for the delivery or when there is a confirmation of service,you can run *+ to recognize revenue. It creates an accounting document that posts to theunbilled revenue account and the revenue account. 6hen the customer is invoiced, anotheraccounting document offsets the unbilled account and impacts the receivables account. There canbe other variations of this process, such as invoicing first and then recognizing the deferred

revenue later. There can also be contracts with call2off orders. In this case, the call2off order willbe delivered and billed.

%trongFTime2based and invoice2related revenue recognition ($) In this scenario, the recognitionof revenue is done on the basis of an invoice, over a time period. The process is triggered whenthe invoice is created and posted to accounting. The process is similar to a variation of option Ain which the customer is billed first and deferred revenue is recognized later. The maGordifference is that option A allows you to either bill first or bill later. 0ption $ limits you tobilling first.

Credit/debit memo revenue recognition ith reference to predecessor !F"!hoose this option for credit and debit memos created with reference to documents that usedrevenue recognition functionality. The revenue recognition category in the preceding documentshould be either A or . If the preceding document is A (time based), it is possible to recognizerevenue in the creditdebit memo over the same duration of time as the original document. If it is (service based), it is possible to recognize revenue on the basis of a specific event as in theoriginal document.

Proposed start date !or accrual period This field controls the start of the accrual2postingperiod. There are two options. !hoose the appropriate option depending on your businessreuirements and whether you plan to use contract documents in the process flow.

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Proposed start date !or accrual period

Proposal Based -n $ontract Start Date The contract start date will be used as the accrual startas well.

Proposal Based -n Billing Plan Start Date ;se this option when you want to refer to thebilling plan rather than contract dates.

Revenue Distribution This field is used to control the distribution of amounts over a certainperiod. It is used in conGunction with revenue recognition category A (time2based). There arevarious options to control how the total value and correctional value are divided over the periods.A correctional value can arise if, for example, there is a correction in the pricing of an order orcontract, after revenue recognition has already been started. In this case, the correctional valuehas to be distributed over the remaining periods for which revenue has not been recognized asyet.

Revenue distribution t+pe

;sing the options, you can specify whether the correctional value is to be divided eually overall posting periods or is to be boo1ed entirely in the first open posting period. &lease chec1 onthe exact reuirements with your +I!0 expert before ma1ing these settings.

Revenue Event This field is used only in the case of revenue recognition category (service2based). 3ou can leave this field blan1 if revenue is not event related. !hoose from the events inthe drop2down list. In the case of a third2party business scenario where a vendor directly deliversgoods or services to your customer, you can specify that an event such as an incoming invoice() should trigger revenue recognition. The customer acceptance date (!) can be another suchevent. %A& has also provided a business add2in (A$IH%$H#>*H#>!H&0$>*) to definecustom events.

#aintain $ccount %etermination

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In this section, you will specify the -/ accounts to be used for deferred revenue and unbilledreceivables, respectively. +ollow the path )M Sales And Distribution Basic Functions

Account Assign*ent'$osting Revenue Recognition Maintain Account Deter*ination Assign 'L Accounts For Revenue And De!erred Revenue %transaction code V/-A&. 3oucan choose the appropriate table from the list, based on the 1ey combination. In the -/ Account

field, specify the revenue account. In the &rovision Acc. field, specify the deferred revenueaccount.The other setting you need to define is for the unbilled receivables account. +ollow the menupath )M Sales And Distribution Basic Functions Account Assign*ent'$osting Revenue Recognition Maintain Account Deter*ination Assign Accounts For 0nbilled

Receivables %transaction code -V0R&"

Assigning accounts !or revenue and de!erred revenue

+or the chart of accounts and reconciliation account, you can specify the unbilled receivablesaccount here.

Assigning accounts !or unbilled receivables

Item Categor& Settings

esides the revenue recognitionrelated settings mentioned earlier, you may reuire othersettings for an item category if you are going to use billing plans. In the definition of the itemcategory, there are fields where you can specify billing relevance and billing plan type.To define

these settings, use the menu path I@-

%ales And $istribution

%ales

%ales $ocument Item$efine Item !ategories (transaction code *0*C).If you want to use a billing plan, set the illing #elevance field to I. Then specify the type ofbilling plan from the list.

)te* categor+ settings !or billing relevance and billing plan

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$1oosing billing relevance ) !or billing plan

22222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222222

2

%creenshots of VF44

2" et Started

%A& menu path

Role 3SBM5Advanced Sc1eduled5Mont1l+ Processing5 De!erred RevenueRecognition 5 VF44 . Revenue Recognition 6orlist

%A& +ast &ath

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At the !ommand /ine, enter" 'nVF44

7" Revenue Recognition8 process worlist8 initial screen

A. +ill in !ompany code, posting periodyear, &osting level &osting date.

$o*pan+ code!;# for main campusPosting period'+ear#evenue period that you wish to recognize. %o if you enter a future posting period youcan recognize the future revenue today.Posting level9:;will recognize revenue per sales document item level per posting period. %o if you ranfor multiple posting periods, everything would be posted today but with separate +Idocuments. lan1 will recognize revenue per sales document. %o multiple line items willbe posted to a single +I document with multiple line items. @ultiple posting periods willnot be distinguished.Posting dateThe date used for the +I document posting date

B. !lic1 E

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A. %elect all the rows of revenue.

To do so, clic1 on the JSelect allJ button.

As a result, a chec1 mar1 appears in the %tat column of each row, as shown above.

B. !lic1 on Save

#esult" 6hen processing is complete, a log displays, as shown below.

4" %-ptional& Revenue Recognition8 review docu*ents created

A. %elect the group (for example, 544444D:?5 above) and clic1 the J$ocumentsJ soft button(shown above).

Result" The %$ documents created in this run are listed by number, as shown below.

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. %elect the document and clic1 on the J$isp.doc.J soft button (see button with glassesabove).

Result" The original bill is displayed (see below).

!. !lic1 on the Accounting soft button (not displayed).

The following +I and !0 documents appear"

$. %elect the last accounting document.

The following +I document recognizing the revenue appears"

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Botice that the revenue account, K44E4:, has a KDD.DD credit and the deferredrevenue liability account, :4:445, has a KDD.DD debit.

E. @onthly %tatement $etailed Transaction #eportafter revenue has beenrecognized from an earlier run of *+.

Mont1l+ State*ent8

K44E4: %ponsored #evenue #ecognized is a new -/ Account

Detailed (ransaction Report

>ventually, the !0 $ocument Bumber will appear below $escription. !lic1ing on the!0 $ocument Bumber will bring up"

!lic1ing on the illing $ocument Bumber will bring up"

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Detailed (ransaction Report %a!ter recogni=ed bill cancellation&