Analyze the Revenue Accounting and Reporting Process

The O2C Company offers cloud infrastructure to their customer. The cloud selection service product is a subscription and is paid monthly. The O2C Company uses of SAP Financial Revenue Accounting and Reporting (FI-RAR) as an extra subledger to create the legally correct accounting view on the operational revenue of hardware and subscription bundles.

SAP RAR automates and simplifies revenue accounting, with decoupled operational sales *billing and revenue accounting. Extra features include:

• Contract Management
• Inbound Processing
• Day-based contract modifications
• SAP Fiori coverage
• HANA-based reporting

Traditionally, ERPs have coupled Revenue Reorganization with billing. It was fine back in the old days. If you're in a manufacturing company, it’s not much of an issue. But in today's market, and especially in high-tech subscription and service-based business models, that coupling doesn’t work anymore.

You must be able to recognize revenue that you haven't billed yet. You might be billing for something that's going to result in recognition into the future. You recognize revenue in arrears in advance.

The approach we’ve taken in SAP S/4HANA is to separate the revenue accounting stream from the other operational fulfillment streams so that any sort of an order or contract secured in the front-end results in the creation of what we call a "revenue contract".

A "revenue contract" contains all revenue obligations. Then, these orders and contracts get fulfilled across various streams. As they're being fulfilled, those signals come back into our revenue accounting engine so that we can again acknowledge the fulfillment of these items and apply the appropriate treatment to the outstanding obligations.

IFRS 15 regulation impacts companies selling hardware and services bundled together and/or running long-term projects via a contract with a customer. They must report according to the new revenue recognition rules starting January 1, 2018. SAP S/4HANA for billing and revenue innovation management (BRIM) and SAP Revenue Accounting and Reporting integration helps to efficiently recognize the revenue.

Let’s discover the "IFRS 15 Five-Step Process" in more detail.

The overall process follows closely along with the five-step guidance model by the various accounting bodies that were involved in the development of current accounting standards around revenue.

1. Identify the Contract with the Customer

When an order is captured within SAP S/4HANA, we recognize the order as a contractual obligation to the customer.

2. Identify the Separate Performance Obligations in the Contract

Then, we automatically identify the appropriate performance obligations based on what's in that order. So, a line item on an order results in at least one, if not multiple performance obligations that are associated with that line item.

3. Determine the Transaction Price

We also identify or determine the transaction price of that order or customer agreement.

4. Allocate the Transaction Price

Based on maintained SSP (stand-alone selling price), we are able to allocate the discounts appropriately across the various performance obligations. This is all automatic. So, we go from an order through these first four steps to create what we refer to as a revenue contract within S/4HANA. That revenue contract contains all of the performance obligations with the appropriate treatment assigned to them and discounts distributed appropriately across those various elements.

5. Recognize Revenue

From there, we move onto the recognition process.

So, for ratable items or time-based items, we go ahead and project the revenue schedule that's associated with those particular items. Then, for other items, like projects or if there are goods that are being fulfilled, and so on, we capture the percent of completion or fulfillment events coming out of the system and bring those back. Also, in the revenue contract, we can appropriately treat and recognize revenue that is associated with those obligations.

The BRIM solution, compliant to the International Financial Reporting Standards (IFRS15), must account for revenue resulting from contracts with customers.

Let’s now look at the Contract Master Data and see how the integration into RAR is realized.

The BRIM solution, compliant to the IFRS15 accounting standard, has to account for the resulting revenues from contracts with customers.

The realization of the integration into RAR is realized out of the following:

• SAP Convergent Invoicing, basically sends the required revenue accounting items (RAIs) for order items, fulfillments, and invoices to Inbound Processing of Revenue Accounting.
• Subscription Order Management provides revenue accounting relevant information for further processing.

Performance obligations refer to distinct promises in a contract with a customer to transfer goods or services. These obligations are a foundational concept in revenue recognition in accounting under standards like the IFRS 15 and the U.S. Generally Accepted Accounting Principles (GAAP - ASC 606).

1. Order Items

When a customer subscribes to a service, SAP SOM captures the contract, order details, and billing schedule. This information is then transferred to SAP RAR where it is mapped to revenue items. This is done based on order items. Order items are revenue accounting orders triggered by the provider contract.

2. Fulfillment Items

Fulfillment items record the actual delivery of goods or the rendering of services to the customer, indicating that some or all performance obligations in a contract have been fulfilled. Fulfillment items are triggered from SAP Convergent Invoicing when billable items are created. These items form the basis for revenue recognition processing. Fulfillment items can be categorized based on the type of business activities and fulfillment events they represent:

• Periodic fulfillments for time-based performance obligations (for example, Recurring Fee).
• Usage-based fees based on actual consumption.
• One-time fee for activation.
• Sales order delivery for hardware or other physical products.

3. Invoice Items

Invoice items are detailed pieces of billing information that are used to manage and automate the revenue recognition process. These items are triggered from SAP Convergent Invoicing when invoice documents are created and encapsulate essential data such as pricing, quantities, and relevant dates tied to customer contracts and performance obligations.

Each invoiced line item represents a specific charge for goods or services provided, such as the following:

1. Recurring Fees
2. Consumption Based usage
3. One-time fee for one off charges
4. Hardware invoice

RAR then processes performance obligations (POBs) to generate IFRS15 or U.S. GAAP ASC606 compliant revenue postings in the general ledger.

Revenue Accounting View

The Revenue Accounting View presents a decoupled operational and accounting process, ensuring that accounting activities do not impede operational workflows and vice versa. This view is designed to fulfill IFRS15 and U.S. GAAP standards, providing a comprehensive and compliant perspective on revenue accounting. It introduces the Billable Item concept, which is independent of service type and service data structure, allowing for flexible and accurate revenue recognition. Furthermore, it offers a unified General Ledger (G/L) Account Determination Process, streamlining the allocation of revenue to the appropriate accounts.

BRIM and RAR Integration

The integration of BRIM and RAR enables a single, unified database, ensuring consistency and efficiency. This integration facilitates the seamless flow of invoicing data into RAR, thereby streamlining the accounting process. By doing so, it provides both operative and accounting views within the same database, enabling real-time access and collaboration between different departments. Moreover, this integration offers full traceability, with transparent document trails that can be tracked from general ledger postings right back to the source documents, enhancing transparency and accountability.

BRIM and RAR Integration

The integration of BRIM and RAR is designed to cater to various industries' needs, demonstrating remarkable flexibility and adaptability. This integration seamlessly adapts to the unique industry-specific and functional requirements of different sectors. One key advantage is its ability to adapt to established industry standards, ensuring compliance and consistency. Furthermore, the integration is tailored to adapt to B2B processes, facilitating smoother transactions and collaborations between businesses. Also, it is designed to adapt to accounting requirements, ensuring accurate financial management and reporting.

Process Automation

Process Automation, a sophisticated approach to managing operations, enables the seamless handling of high-volume tasks through mass activities and parallelization. It ensures all mass processes run automatically, significantly enhancing efficiency and productivity. Also, the system includes robust error correction and reversal processes to manage and rectify outages or configuration errors promptly. Ensuring security and accountability, the system also incorporates access control and audit mechanisms to monitor and regulate all automated operations.