Discovering Event-Based Revenue Recognition

Objective

After completing this lesson, you will be able to analyze the key components of Event-Based Revenue Recognition.

Introduction

Unit Two Key Topics

Welcome to your journey through SAP's Event-Based Revenue Recognition (EBRR) solutions! Before we dive into the details, let's get a high-level overview of what to expect. SAP's revenue recognition portfolio includes key elements like Event-Based Revenue Recognition, supported SAP Fiori applications, and compliance with IFRS and US-GAAP standards. These systems work together to ensure accurate and timely financial reporting for project-based services.

Our focus will be on EBRR, covering its configuration, process steps, methods, and compliance with accounting standards. You'll learn how EBRR handles real-time revenue and cost adjustments for fixed price, time and material, and periodic service type projects. We'll explore the roles of project managers and controllers, who are critical in managing service activities efficiently.

As we explore EBRR, pay attention to the key concepts like double journal entries, the importance of period-end runs, and the specific events that trigger revenue recognition. We'll discuss the various methods of revenue recognition, such as cost-based and time-based, and how they apply to different project types. Understanding the configuration settings and tables, as well as the supported SAP Fiori applications like Event-Based Revenue Recognition - Projects and Display Project WIP Details, will help you grasp the full scope of SAP's revenue recognition solutions.

This high-level introduction sets the stage for a deeper dive into each component and its functionalities. You'll also get a chance to understand how the system manages generally accepted accounting standards like IFRS and US-GAAP, and the significance of these standards in financial reporting.

Enjoy the journey!

Introduction: Event-Based Revenue Recognition - Project-Based Services

Introducing Revenue Recognition

The figure demonstrates an overview of the process flow of the Event-Based Revenue Recognition (1IL) scope item.

The diagram illustrates the roles of cost accountants in sales and overhead. The cost accountant in sales handles event-based revenue recognition and project work-in-progress (WIP) details reporting. This information is communicated to the cost accountant in overhead, who is responsible for project actual data reporting. The flow of data ensures accurate financial tracking and reporting of project-related costs and revenues.

Description

Event based Revenue Recognition calculates and posts real time revenue and cost adjustment for professional services for fixed price, time and material, and periodic service type projects. Processes that do not write a financial line item do not result in any real time revenue recognition postings (for example, changes of plan data do not directly result in revenue recognition postings) although some of these processes may affect the recognition of revenue (for example, changes in plan data could affect the calculated percentage of completion (POC) and therefore the recognized revenue).

Period end closing postings (periodic revenue recognition) recalculates the recognized revenue considering all available data at the end of the period and adjusts the recognized revenue that was calculated in real time during the period based on events and on a "best guess" basis. Complete and final figures are then available after period end closing.

Batch processes are provided for review and can automatically correct errors that may happen in the real time calculation of revenue and related financial postings due to a variety of factors.

The main principle supporting real time revenue recognition is the double journal creation in the system. All postings considered events for EBRR automatically generate a parallel revenue recognition posting in finance:

The diagram explains the financial integration process involving source documents, time confirmations, and revenue recognition within the SAP Universal Journal (ACDOCA). The source document is a CATS time confirmation for 1 hour of senior consultant work on a project WBS element. This confirmation posts through an accounting interface, creating a CO document and a revenue recognition journal entry. The CO document logs consulting activities with associated G/L accounts, activity types, quantities, amounts, cost centers, and WBS elements. The revenue recognition journal entry records revenue adjustments and WIP/accrued revenue, showing the financial impact of project work. Planned costs are €10,000, and planned revenue is €12,000.

Events that trigger recognition of revenue include:

  • Time postings via the time sheet
  • Activity allocations (not created from the time sheet, for example, to notify consumed quantities on usage-based work packages)
  • Expense postings
  • Billing
  • Period-end runs

Note

Note that Some events, such as price changes or changes in project plan, are not considered by EBRR to automatically update the revenue data and create parallel postings. Even though the project revenue position at any moment during the period is close to accurate, to ensure its full validity, the period end closing process is a necessary process step.

Key Process Steps

  • Execute event-based revenue recognition for projects.

  • Adjust revenue recognition.

  • Report project actual data.

  • Report project WIP details (relevant only for time and expense projects).

Benefits

  • Change the underlying method of revenue recognition significantly (available in SAP S/4HANA).

  • Adjust for imminent loss, anticipated sales deductions, and unrealized costs.

  • Run a simulation to view important project KPIs via semantic tags.

  • Ensure correctness of posted values after period-end closing, with no separate settlement required.

Understanding Professional Services Event-Based Revenue Recognition (1IL)

Note

An SAP S/4HANA Cloud training system is required to complete the following exercise.

Training Systems for Self-Paced Students: If you are working through the training content self-paced in the SAP Learning Hub, please purchase an SAP Learning System Access contingent to access the training system designed to accompany exercises in the training course content. Navigate to SAP Learning System Access Quick Startand search for the course code to locate the correct training system.

To execute this exercise with best system performance you can remove any other business roles assigned to your user except for S4C Generic Role provided. You can assign further roles as required in the subsequent exercise anyway and can perform this task in the same step if necessary.

Some exercises use the characters ### as placeholders for your three digit user number. Once you are on the SAP Fiori Launchpad of the training system, open the user profile icon in the upper right corner. There you will see your user: A followed by digits. Please use the last three digits of your user consistently instead of ### whenever you see ### in an exercise.

Task 1: Check User Authorizations

Steps

  1. Make sure the following roles are assigned to your user:

    Business Role IDBusiness Role
    BR_BPC_EXPERTConfiguration Expert - Business Process Configuration
    BR_OVERHEAD_ACCOUNTANTCost Accountant - Overhead
    BR_SALES_ACCOUNTANTCost Accountant - Sales

    1. Look for and open the SAP Fiori application Maintain Business Users and select your username in the search section.

    2. Click on the username item or select it and click on Edit.

    3. In the user details Assigned Business Roles section make sure the required roles are present. If they are not, click on Add, search by the business role description in the exercise and add them to your user. You need to add one role at a time. Save your business user after you finish adding roles.

      Note

      Some roles may enable new spaces in SAP Fiori. You may need to refresh your screen in order to see them.

Task 2: Verify Settings for Revenue Recognition Calculation

Revenue in customer projects is recognized immediately every time a revenue relevant event is recorded in the project. Relevant events are most transactions generating an actual cost or revenue posting for the project, such as a time recording by an assigned employee, posting of an invoice, a service entry sheet for the project, etc.

As part of this exercise, you can repeat steps from exercises in units covering time recordings, sales order processing, or procurement for projects to verify the real time effect on revenue recognition.

Recognized revenue is calculated differently for time and expense, fixed price and periodic service work packages.

Steps

  1. Verify the default methods used in this exercise (for contract types PS01, PS02, PS06 and PS07) in company codes 1010 and 1710 in the configuration table Derivation of Recognition Key for Projects.

    Note

    Implementation Activities application will be available if SAP Central Business Configurations is enabled. Otherwise select the application Manage Your Solution and search for the configuration table using the search text field.

    1. In the overview panel, select space Business Process Configuration. You may need to select it from the "More" drop down list, or under My Spacesin the Open Menu option.

    2. Open Implementation Activities application.

    3. Click on the first search option, in the search screen that opens type "derivation of recognition key" and click on search. The matching configuration tables found are displayed in a pop-up screen.

      Note

      Derivation of recognition key can be found on Implementation Activities.

    4. Select the configuration table Derivation of Recognition Key for Projects and click on "Continue". Execute the IMG activity and look for the entries for company codes 1010 and 1710 and contract types PS01, PS02, PS06 and PS07. The result should be the following:

      Contract TypeRecognition Key
      PS01Fixed PriceSPFCCost based POC: Recognized revenue = Plan revenue from billing plan * (Actual Cost / Plan cost from EAC)
      PS02Time and ExpenseSPTMDIP profile: Recognized revenue = billed revenue + unbilled revenue calculated from invoice simulation
      PS06Periodic ServiceSPPCBased on billing plan, cost follows revenue
      PS07Usage BasedSPTMDIP profile: Recognized revenue = billed revenue + unbilled revenue calculated from invoice simulation

Task 3: Monitor Revenue Recognition for Projects

Steps

  1. Search for and run the application " Project Financial Booklet - Professional Services" and select your project.

    1. In the search field project enter your project.

    2. To the fieldFiscal Year Period, type the current month and current year.

    3. Select ledger0L.

    4. Enter the Company Code1010 (the one in your project).

    5. Click on Go.

      The result should display one aggregated item for the project showing Recognized Revenue, Recognized Cost, Recognized Margin, Planned Revenue and Cost Baselines. In the left-hand side options, select the Layout icon. Scroll down in the Available Objects panel until you find "WBS Element" expand it, and select "Billing Element".WBS element column showing the billing elements will be added as a Row in the report. Now you can see how the various amounts are distributed in the project work packages.

  2. In the application "Event-Based Revenue Recognition - Projects", select the time and expense work package (WBS element) and see its revenue recognition details. Note the billed revenue, the recognized revenue and the revenue adjustment, what is the relationship between them?

    1. Run the application "Event-Based Revenue Recognition - Projects" and select your Project in the Project Definition Search field, then click on Go.

    2. Select the time and expense work package. You can recognize it by the assigned Revenue Recognition Key SPTM .

    3. In the Income Statement section, the billed revenue shows the total billed amount to date, the revenue adjustment is calculated (simulated) revenue based on the latest bookings in the work package and still not recognized.

      Recognized revenue is the calculated value reflected in the P&L account.

      Billed Revenue + Revenue Adjustment=Recognized Revenue (Income statement)
      Revenue Adjustment=Deferred Revenue – Accrued Revenue (Balance sheet)

  3. Note the recognized cost, how is the recognized margin calculated?

    1. Recognized margin = Recognized Revenue – Recognized COS

  4. Navigate to the Line Item report for G/L accounts. Check the line items under Consulting and see the details for the WIP accounts after.

    1. In the upper right corner of the screen, click on the Related Apps drop down and select G/L Accountant Line Items.

    2. Expand the G/L account Consulting to see the underlying individual line items.

    3. Expand the G/L account WIP Accrued Revenue, Billed Revenue Domestic, and Revenue Adjustment. Note the relationship between their line items.

  5. Return to the revenue recognition summary screen and open the Revalue screen. Simulate the revaluation and check the explanation. See the explanation for each of the processing steps.

    1. Click back to the left of the SAP icon.

    2. Select the button Revalue.

    3. In the pop up screen, click on Simulate. You can compare the results under Actual Values and Simulation Results. Simulation recalculates the recognized revenue as per period-end closing.

    4. Click on Explain simulation and analyze the various steps performed by the system in the simulation. Note that you can post the results of the revaluation after analyzing the simulated values.

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