Revenue Recognition Guide

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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
ismeasurable
.
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 recognition
principle is a cornerstone of accrual accountingtogether withmatching principle.
They bot h determi ne t heaccounting period, i n
whi c h revenuesandexpensesare recogni zed. Accor di ng to t he
pri nci pl e, r evenues ar e recogni zed when t hey ar e r eal i sed
or realisable, and are earned (usually when goods are transferred or
services rendered), no matter when cash is received. Incash accounting
in contrast revenues are recognized when cash isreceived no matter
when goods or services are sold.Cash can be received in an earlier or later period
than obligations are met (when goods or services are delivered) and related
revenues are recognized that results in the following two typesof accounts:

Accrued revenue: Revenue is recognized before cash is received.

Deferred revenue: Revenue is recognized after cash is received.SAPs revenue
recognition functionality enables you to post the billing documents and
recognizerevenue 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 therevenue accounts
are posted with this transaction. However, certain business scenarios
requirer evenue to be r ecogni zed ei t her bef or e or af t er t he
i nvoi ce has been creat ed. The r evenuerecognition 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
Accrued revenue(unbilled receivables accounts). If you bill the customer
first and recognize revenue at a later point, the amount is classified as
deferred revenue
i n the i nt eri m. On t he ot her hand, i f t he business requires you to
recognize revenue periodically but bill the customer later, then
theamount is kept in the
unbilled receivables
account.Suppose you have to bill the customer first and recognize revenue later.
Heres 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, well present a simple example. Suppose a customer has purchased a one-
year warranty from Galaxyfor 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-basedrevenue recognition with
up-front billing.
In this example, youd set up a service contract in SAP specifying the
start and end dates. Youwould 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 createequal buckets in which the revenue
will be recognized. If the customer is billed for $1,200, therevenue 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 andthe posting
period as the entire life of the contract. The details are displayed. The Revenues
datai s di spl ayed i n t he upper wi ndow, and t he Control Li nes dat a
appears i n the l ower one. TheControl 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
anunrecognized component. In this case, the customer has been
invoiced for $1,200. The revenuehas been deferred; hence, the unrecognized
revenue is $1,200.
Revenue recognition, post revenue selection screenRevenue 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 see12 revenue buckets spread over the
posting periods. The Year/Per. field shows the posting perioda n d y e a r . I n
e v e r y p e r i o d , r e v e n u e w i l l b e r e c o g n i z e d i n e q u a l
a mo u n t s ( $ 1 0 0 ) . T h e corresponding G/L accounts appear in the list. In
this example, suppose at the end of first period,t he user sel ects the f i r st
l i ne ( f or per i od 2009/001) and cl i cks Col l ecti ve Processi ng.
Theaccounti ng document i s generat ed, and revenue i s recogni zed
t o t he ext ent of t he 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 revenuer ecogni ti on entry i s
made f or $100. I t updates t he r evenue account and of f sets t he
def err edr e v e nue a c c o unt . T hi s pr o c e s s c o nt i nue s e v e r y
pe r i o d unt i l t he t o t a l r e v e nue ha s be e n recognized.
Accounting view, deferred revenue scenario.
If there is a mistake in recognizing revenue, you can cancel the entry
using transaction
VF46.
Fol l ow t he pat h
SAP Menu

Logistics

Sales and Distribution

Billing

RevenueRecognition

Maintain Cancellation List (transaction code VF46)
.You can derive a revenue report using transaction VF45. It lists all the details
related to a givensales 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 AndDistribution

Billing

Revenue Recognition

Revenue Report (transaction code VF45).This was a simple example of a
revenue recognition process. There can be other variations aswell. 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 ber ecogni zed bef or e t he customer i s bi l l ed.
Consi der t he exampl e of Gal axy s war rant y. Avariation 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, revenue of $100 is recognized, but it has not
been billed yet. In this case, it updatesthe Unbilled A/R account. The accounting
entries for this variation of the process.
Accounting view, unbilled A/R scenario
Now lets turn to service-based revenue recognition. In this case, the
revenue recognition istriggered by a specific event, such as posting a
goods issue. Suppose a customer has placed anorder with Galaxy for some
musical instruments. As per the delivery schedule, some instrumentsare to be
delivered in the first quarter of the year, and others in the second. The customer
will besent a combined invoice at the end. Whenever a delivery is
created and a goods issue is posted, you can tri gger the r ecogni ti on
of r evenue. Thi s ensur es that r evenue i s r ecogni zed i n
eachfinancial 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 SAPFI/CO expert. Since it is complex functionality, it is not
open for configuration, and you have tocontact SAP through an OSS message to
get it activated. Refer to SAP Service Marketplace OSSnote 779366 for the initial
activation. As discussed earlier, the FI/CO experts have to set up G/Laccounts to
be used for deferred revenue and unbilled receivables. SAP Service
MarketplaceOSS note 777996 provides detailed guidance on the setup of
these accounts. Once this initialsetup is completed, you can proceed with the
steps in the following section.
TIP
Before you proceed with configuring revenue recognition functionality, please
read the SAPS e r v i c e Ma r k e t p l a c e O S S n o t e 1 2 5 6 5 2 5 . I t
c o n t a i n s a b e s t - p r a c t i c e d o c u me n t a n d recommendations from
SAP. It also covers the process variations and flow diagrams. Be advisedthat the
content of the document is frequently updated, and new notes are often
released. Pleasesearch 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 ItemCategories (OVEP).
Select the item category that you plan to activate, and go to the details screen.
This screen withthe Business Data tab in it.
Maintaining item categories for revenue recognition
Lets look 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 time-based or
service-basedrevenue 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 aservice. The process starts with a contract document (or sales
document with a billing plan). Inthis 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 theunbi l l ed r evenue
account and the r evenue account. When t he customer i s
i nvoi ced, anot her 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 deferredrevenue
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 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 Ai n
whi ch t he customer i s bi l l ed f i rst and def erred r evenue i s
r ecogni zed l at er. The maj or 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 usedrevenue recognition functionality. The revenue recognition
category in the preceding documentshould be either A or B. If the preceding
document is A (time based), it is possible to recognizerevenue in the credit/debit
memo over the same duration of time as the original document. If it isB (service
based), it is possible to recognize revenue on the basis of a specific event as in
theoriginal 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 businessrequirements and
whether you plan to use contract documents in the process flow.
Proposed start date for accrual periodProposal Based On Contract Start Date
The contract start date will be used as the accrual startas 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
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 or contract, 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 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 onthe 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 inthe drop-down list. In the case of a third-party business scenario
where a vendor directly deliversgoods 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 suchevent. SAP has
also provided a business add-in (BADI_SD_REV_REC_PODEV) to definecustom
events.
Maintain Account Determination
In this section, you will specify the G/L accounts to be used for deferred revenue
and unbilledreceivables, 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)
. Youcan choose the appropriate table from the list, based on the key
combination. In the G/L Accountfield, specify the revenue account. In the
Provision Acc. field, specify the deferred revenueaccount.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 UnbilledReceivables (transaction code OVUR).Assigning accounts for
revenue and deferred revenue
For the chart of accounts and reconciliation account, you can specify the unbilled
receivablesaccount here.
Assigning accounts for unbilled receivables
Item Category Settings
Besides the revenue recognitionrelated 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 itemcategory, there are fields where you can specify billing
relevance and billing plan type.To definethese 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
Choosing billing relevance I for billing plan
---------------------------------------------------------------------------------------------------------------------
Screenshots of
VF44
1. Get Started

SAP menu path
Role ZSBM=>Advanced Scheduled=>Monthly Processing=> Deferred RevenueRecognition =>
VF44 - Revenue Recognition Worklist


SAP Fast Path
At the Command Line, enter:
/nVF44

2. Revenue Recognition: process worklist: initial screen
A.
Fill in Company code, posting period/year, Posting level & Posting date.
Company code
CUR for main campus
Posting period/year
Revenue period that you wish to recognize. So if you enter a future posting period
youcan recognize the future revenue today.
Posting level3
will recognize revenue per sales document item level per posting period. So if you
ranfor multiple posting periods, everything would be posted today but with
separate FIdocuments. Blank will recognize revenue per sales document. So
multiple line items will be posted to a single FI document with multiple line items.
Multiple posting periods willnot be distinguished.
Posting date
The date used for the FI document posting date
B.
Click
Execute
A list of revenue items to be recognized displays, as shown in the next step.
3. Revenue Recognition: process worklist
A.
Select all the rows of revenue.

To do so, click on the "
Select all
" button.As a result, a check mark appears in the Stat column of each row, as
shown above.
B.
Click on
Save
Result: When processing is complete, a log displays, as shown below.
4. (Optional) Revenue Recognition: review documents created
A.Select the group (for example, 1000003251 above) and click the
"Documents" soft button(shown above).
Result
: The SD documents created in this run are listed by number, as shown below.

B.Select the document and click on the "Disp.doc." soft butt on (see
button with glassesabove).
Result
: The original bill is displayed (see below).C.Click on the Accounting soft
button (not displayed). The following FI and CO documents appear:D.Select
the last accounting document. The following FI document recognizing the
revenue appears:


Notice that the revenue account, 800602, has a 833.33 credit and the
deferredrevenue liability account, 202001, has a 833.33 debit.
E.

Monthly Statement
&
Detailed Transaction Report
after revenue has beenrecognized from an earlier run of VF44.
Monthly Statement:
800602 Sponsored Revenue Recognized is a new G/L Account
Detailed Transaction Report
Eventually, the CO Document Number will appear below Description. Clicking on
theCO Document Number will bring up:Clicking on the Billing Document Number
will bring up:


Detailed Transaction Report (after recognized bill cancellation)