Revenue Recognition - SAP SD

SAP’s revenue recognition functionality enables you to post the billing documents and recognize revenue at different points in time. In the regular process, SAP recognizes revenue as soon as the billing document is posted to accounting. The receivables account (customer account) and the revenue account are posted with this transaction. However, certain business scenarios require revenue to be recognized either before or after the invoice has been created. The revenue recognition function provides a separate transaction (VF44) to trigger the recognition of revenue. Here, two additional G/L accounts come into play: the deferred revenue and unbilled receivables accounts. If you bill the customer first and recognize revenue at a later point, the amount is classified as deferred revenue in the interim. On the other hand, if the business requires you to recognize revenue periodically but bill the customer later, then the amount is kept in the unbilled receivables account.

Suppose you have to bill the customer first and recognize revenue later. Here’s what will happen:

  1. The billing document is posted: The receivables account and the deferred revenue account are 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 the revenue account. The revenue recognition is thus completed.

Revenue Recognition Process

The revenue recognition process has several variations. To discuss the process flow, we’ll present a simple example. Suppose a customer has purchased a one-year warranty from Galaxy for a specific musical instrument. The customer has to be billed up front, but the revenue has to be recognized on a monthly basis over the life of the contract. This is an example of time-based revenue recognition with up-front billing.
In this example, you’d set up a service contract in SAP specifying the start and end dates. You would also create a billing document with reference to the contract using VF01.

When it comes to revenue recognition, the system uses the contract start and end dates to create equal “buckets” in which the revenue will be recognized. If the customer is billed for $1,200, the revenue recognized per period will be $100 each, for 12 months.
The transaction that triggers the revenue recognition is VF44. You can access it from SAP Menu ➢ Logistics ➢ Sales And Distribution ➢ Billing ➢ Revenue Recognition ➢ Edit Revenue List.

the selection screen of VF44. In this case, we have specified the contract document number and the posting period as the entire life of the contract. The details are displayed. The Revenues data is displayed in the upper window, and the Control Lines data appears in the lower one. The Control Lines record contains information such as the total value of the contract. The Recog. Rev. field shows the total revenue recognized until date. Unrec. Rev. is the balance, which is an unrecognized component. In this case, the customer has been invoiced for $1,200. The revenue has been deferred; hence, the unrecognized revenue is $1,200.

Revenue recognition, post revenue selection screen

Revenue recognition, post revenue selection screen

Revenue recognition work list

Revenue recognition work list

The Revenues list shows the revenue amounts that would be recognized in the selected posting period. Since in this example we are checking data for the entire life of the contract, we can see 12 revenue buckets spread over the posting periods. The Year/Per. field shows the posting period and year. In every period, revenue will be recognized in equal amounts ($100). The corresponding G/L accounts appear in the list. In this example, suppose at the end of first period, the user selects the first line (for period 2009/001) and clicks Collective Processing. The accounting 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 ($1,200) is placed in the deferred revenue account. Each month, a revenue recognition entry is made for $100. It updates the revenue account and offsets the deferred revenue account. This process continues every period until the total revenue has been recognized.

Accounting view, deferred revenue scenario

Accounting view, deferred revenue scenario

If there is a mistake in recognizing revenue, you can cancel the entry using transaction VF46. Follow the path SAP Menu ➢ Logistics ➢ Sales And Distribution ➢ Billing ➢ Revenue Recognition ➢ Maintain Cancellation List (transaction code VF46).

You can derive a revenue report using transaction VF45. It lists all the details related to a given sales document. You can check all the revenue documents and cancellation documents that have been posted over a period of time. It is possible to display the accounting documents that have been created. You can access this report using the path SAP Menu ➢ Logistics ➢ Sales And Distribution ➢ Billing ➢ Revenue Recognition ➢ Revenue Report (transaction code VF45).

This was a simple example of a revenue recognition process. There can be other variations as well. For 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 be recognized before the customer is billed. Consider the example of Galaxy’s warranty. A variation could be that the customer is not billed up front but instead billed quarterly, as per a billing plan attached to the contract. The revenue will be recognized in each period. At the end of first period, a revenue of $100 is recognized, but it has not been billed yet. In this case, it updates the Unbilled A/R account. the accounting entries for this variation of the process.

Accounting view, unbilled A/R scenario

Accounting view, unbilled A/R scenario

Now let’s turn to service-based revenue recognition. In this case, the revenue recognition is triggered by a specific event, such as posting a goods issue. Suppose a customer has placed an order with Galaxy for some musical instruments. As per the delivery schedule, some instruments are to be delivered in the first quarter of the year, and others in the second. The customer will be sent a combined invoice at the end. Whenever a delivery is created and a goods issue is posted, you can trigger the recognition of revenue. This ensures that revenue is recognized in each financial quarter, although the customer is billed at a later point in time.

Set Up Revenue Recognition

Configuring revenue recognition requires close coordination with your finance team and SAP FI/CO expert. Since it is complex functionality, it is not open for configuration, and you have to contact SAP through an OSS message to get it activated. Refer to SAP Service Marketplace OSS note 779366 for the initial activation. As discussed earlier, the FI/CO experts have to set up G/L accounts to be used for deferred revenue and unbilled receivables. SAP Service Marketplace OSS note 777996 provides detailed guidance on the setup of these accounts. Once this initial setup is completed, you can proceed with the steps in the following section.

TIP Before you proceed with configuring revenue recognition functionality, please read the SAP Service Marketplace OSS note 1256525. It contains a best-practice document and recommendations from SAP. It also covers the process variations and flow diagrams. Be advised that the content of the document is frequently updated, and new notes are often released. Please search for the latest note number in OSS Search before proceeding.

Set Up Revenue Recognition for Item Categories

Revenue recognition is controlled at the item category level.

To create the settings, follow the path IMG ➢ Sales And Distribution ➢ Basic Functions ➢ Account Assignment/Costing ➢ Revenue Recognition ➢ Set Revenue Recognition For Item Categories (OVEP).

Select the item category that you plan to activate, and go to the details screen.this screen with the Business Data tab in it.

Maintaining item categories for revenue recognition

Maintaining item categories for revenue recognition

Let’s look at the fields in this screen:

Revenue Recognition In this field, specify the type of process you plan to use. In this field, you can specify the revenue recognition category you are using, such as time-based or service-based revenue recognition. Here are the options to choose from:

Time-based revenue recognition (A) Choose this option if your business scenario calls for revenue recognition over a period of time, usually the length of a contract or the duration of a service. The process starts with a contract document (or sales document with a billing plan). In this process, revenue is recognized in equal parts, over the duration of this contract.

Service-based revenue recognition (B) In this scenario, you carry out revenue recognition based 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 VF44 to recognize revenue. It creates an accounting document that posts to the unbilled revenue account and the revenue account. When the customer is invoiced, another accounting document offsets the unbilled account and impacts the receivables account. There can be other variations of this process, such as invoicing first and then recognizing the deferred revenue later. There can also be contracts with call-off orders. In this case, the call-off order will be delivered and billed.

strong>Time-based and invoice-related revenue recognition (D) In this scenario, the recognition of revenue is done on the basis of an invoice, over a time period. The process is triggered when the invoice is created and posted to accounting. The process is similar to a variation of option A in which the customer is billed first and deferred revenue is recognized later. The major difference is that option A allows you to either bill first or bill later. Option D limits you to billing first.

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

Proposed start date for accrual period This field controls the start of the accrual-posting period. There are two options. Choose the appropriate option depending on your business requirements and whether you plan to use contract documents in the process flow.

Proposed start date for accrual period

Proposed start date for accrual period
Proposal Based On Contract Start Date The contract start date will be used as the accrual start as well.

Proposal Based On Billing Plan Start Date Use this option when you want to refer to the billing plan rather than contract dates.

Revenue Distribution This field is used to control the distribution of amounts over a certain period. It is used in conjunction with revenue recognition category A (time-based). There are various 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 or contract, after revenue recognition has already been started. In this case, the correctional value has to be distributed over the remaining periods for which revenue has not been recognized as yet.

Revenue distribution type

Revenue distribution type

Using the options, you can specify whether the correctional value is to be divided equally over all posting periods or is to be booked entirely in the first open posting period. Please check on the exact requirements with your FI/CO expert before making these settings.

Revenue Event This field is used only in the case of revenue recognition category B (service-based). You can leave this field blank if revenue is not event related. Choose from the events in the drop-down list. In the case of a third-party business scenario where a vendor directly delivers goods or services to your customer, you can specify that an event such as an incoming invoice (B) should trigger revenue recognition. The customer acceptance date (C) can be another such event. SAP has also provided a business add-in (BADI_SD_REV_REC_PODEV) to define custom events.

Maintain Account Determination

In this section, you will specify the G/L accounts to be used for deferred revenue and unbilled receivables, respectively. Follow the path IMG ➢ Sales And Distribution ➢ Basic Functions ➢ Account Assignment/Costing ➢ Revenue Recognition ➢ Maintain Account Determination ➢ Assign G/L Accounts For Revenue And Deferred Revenue (transaction code VKOA). You can choose the appropriate table from the list, based on the key combination. In the G/L Account field, specify the revenue account. In the Provision Acc. field, specify the deferred revenue account.The other setting you need to define is for the unbilled receivables account. Follow the menu path IMG ➢ Sales And Distribution ➢ Basic Functions ➢ Account Assignment/Costing ➢ Revenue Recognition ➢ Maintain Account Determination ➢ Assign Accounts For Unbilled Receivables (transaction code OVUR).

Assigning accounts for revenue and deferred revenue

Assigning accounts for revenue and deferred revenue
For the chart of accounts and reconciliation account, you can specify the unbilled receivables account here.

Assigning accounts for unbilled receivables

Assigning accounts for unbilled receivables

Item Category Settings

Besides the revenue recognition–related settings mentioned earlier, you may require other settings for an item category if you are going to use billing plans. In the definition of the item category, there are fields where you can specify billing relevance and billing plan type.To define these settings, use the menu path IMG ➢ Sales And Distribution ➢ Sales ➢ Sales Document Item ➢ Define Item Categories (transaction code VOV7).
If you want to use a billing plan, set the Billing Relevance field to I. Then specify the type of billing plan from the list.

Item category settings for billing relevance and billing plan

Item category settings for billing relevance and billing plan

Choosing billing relevance I for billing plan

Choosing billing relevance I for billing plan


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