Explaining Revenue Recognition Methods

Objective

After completing this lesson, you will be able to Recognize and understand the supported methods for Event Based Revenue Recognition.

Methods for Event-Based Revenue Recognition

Methods for the recognition of revenue in projects can be grouped according to the billing element types supported by customer projects in Professional Services:

  • Time and Expenses
  • Fixed Price
  • Periodic Services

For each of these types, several calculation methods are supported as per industry best practices. The applied method in each case is determined by the system by selecting the corresponding Recognition Key. The rules for the selection of recognition keys are setup in configuration and explained in Lesson 5 - Configuring Event Based Revenue Recognition of this Unit.

The following tables describe each of the recognition keys/methods by type and their basic calculation rules:

Time and Expense Revenue Recognition Keys

Time and Expense​
Recognition KeyRecognition method description
SPTM (default)​

Time and Material DIP based

Revenue is recognized by evaluating unbilled time and expenses based on SD conditions and adding the billed revenue. COGS are recognized as they occur.​

Revenues are accrued at the time of recognition and deferred at billing.​

Recognized revenue = Billed revenue + Revenue adjustments ​

Recognized cost = Actual cost + COS adjustments​

Period closing nets out contract assets (accruals) and liabilities (deferrals).​

SPNTM​

Time and Material DIP based: No Revenue Recognition

Revenue and COGS are recognized s they occur. Period end closing clears existing revenue recognition postings.​

Fixed Price Revenue Recognition Keys

Fixed Price
Recognition Key​Recognition method description ​
SPFC (default)​

Fix Price Cost based POC

Revenue is recognized on cost based percentage of completion. POC = Actual cost from event / Planned cost (confirmed EAC)​

Recognized revenue = Plan revenue * POC | COGS are recognized as they occur.​

SPFCCM​

Fix Price Completed Contract Method

Revenue and COGS are deferred during execution, and are only recognized by the period end closing run, when the stage of a project is set as "Completed".​

SPFCQ​

Fix Price Cost based POC by QTY

Revenue is recognized on quantity based percentage of completion. POC = Actual hours / Planned hours​

Recognized revenue = Planned revenue * POC | COGS are recognized as they occur.​

SPFCR​

Fix Price Revenue based POC

POC = Event billed amount / Planned revenue. ​

Recognized revenue = billed revenue | COGS = Planned cost * POC​

SPFCTR​

Fix Price Cost based POC Target Revenue

Calculates like SPFC, but also includes the employee profit center in the results (target revenue) and the profitability report. Thus you can report your margin with respect to the origin profit center when it differs from the WBS profit center for fix price projects (for T&M is a given).​

SPNFC​

Fix Price POC No Rev Rec

Revenues and COGS are recognized as they occur. The period end closing will clear existing revenue recognition postings, except effects from bundling.​

Periodic Service Revenue Recognition Keys

Periodic Service
Recognition Key​Recognition method description ​
SPPC (default)​

Periodic Services

Revenue recognized based on planned revenue. COGS recognized based on actual costs. Progress as per the financial periods delivered over the total planned periods of the billing item/project (not the schedule item alone).​

POC = Accumulated periods to date / total periods of the service | Recognized revenue = Planned revenue * POC | Recognized cost = Actual cost * POC​

SPPC1​

Periodic Services (No cost deferral)

Revenue recognized based on billing plan by time. COGS recognized as incurred. Distribution per financial periods.​

POC = Accumulated periods / total periods of the service | Recognized revenue = Planned revenue * POC | Recognized cost = Actual cost​

SPNPC​

Periodic Services No Rev Rec

Revenues and costs are recognized as incurred. Period end-closing clears existing revenue recognition postings, excepts effects from bundling​

Accounting Example: Time and Expenses (SPTM)

The following is an example of how Event Based Revenue Recognition is recorded in finances. This example should provide a general understanding of the accounting principles for the recognition of revenue and how they affect the visualization in the Event-Based Revenue Recognition – Projects application. For details on accounting for this and other methods, please refer to the document "Event-Based Revenue Recognition for Customer Projects – SAP S/HANA Cloud".

Steps

  1. April 13 – Consultant books 10 hours a cost rate of $65/hour and sales price of $100/hour

    Transaction type TBRR corresponds to revenue recognition postings generated by the system according to the Event Based Revenue Recognition double journal principle.

    Step 1: Time Booking - Accounting

    Ref. DocumentTransaction TypeJournal EntryAmount
    CATS​RKL​

    DR Activity Allocation – Project​

    CR Activity Allocation – Cost Center​

    $650 (10h x $65/h)​

    $650​

    CATS​TBRR​

    DR WIP Accrued Revenue (BS account)​

    CR Revenue Adjustments (P&L account)​

    $1000 (100h x $100/h)​

    $1000​

  2. April 16 – Consultant posts travel expenses on the customer project for $200.

    Step 2: Expenses - Accounting

    Ref. DocumentTransaction TypeJournal EntryAmount
    RMRP​RKU1​

    DR Travel Expenses – Project​

    CR Travel Expenses – Cost Center​

    $200​

    $200​

    RMRP​TBRR​

    DR WIP Accrued Revenue (BS account)​

    CR Revenue Adjustments (P&L account)​

    $200​

    $200​

    In addition to the recognized revenue and cost of sales, the system calculates the recognized margin as the difference of both.

  3. April 17 – Project Manager issues the bill to the customer for the work and expenses accumulated in the project to date.

    Step 3: Submit Customer Invoice - Accounting

    Ref. DocumentTransaction TypeJournal EntryAmount
    VBRK​SD00​

    DR Accounts Receivable (BS account)​

    CR Billed Revenue – (P&L account)​

    $1.200​

    $1.200​

    VBRK​TBRR​

    DR Revenue Adjustments (P&L account)​

    CR Deferred Revenue (BS account)​

    $1.200​

    $1.200​

    When the invoice is submitted, revenues are posted as actuals and adjustments for pending revenues are zeroed accordingly.

    Asset accrued revenue is paired with a deferred revenue liability. These are netted against each other at period end closing to only reflect the remaining balance.

  4. April 31 - Period end closing

    Step 4: Period-end Closing - Accounting

    Ref. DocumentTransaction TypeJournal EntryAmount
    TBRR​TBRR​

    DR Deferred Revenue (BS account)​

    CR WIP Accrued Revenue (BS account)​

    $1.200​

    $1.200​

    Assets and liabilities are netted against each other at period close

Result

Summary Notes

  • Recognized revenue = Billed revenue + Revenue adjustments
  • Recognized cost = Actual cost + COS adjustments
  • Steps with the apostrophe are automatically generated by EBRR.
  • Adjustments represent pending transactions for which no actual has been posted yet.
  • Recognized revenue and cost are calculated according to the applied method. Actual postings may or may not supersede the calculated values, also depending on the applied method.
  • Balance account "Accrued Revenue" is an asset reflecting the accumulated pending billing amount, while "Deferred Revenue" is the balancing liability account reflecting submitted invoice amounts. Both are netted at period end closing to just reflect the balance amount, either a pending billing right or billing in excess of the recognized revenue.
  • To analyze the financial line items in the system you can navigate to "G/L Account Line Items" report app from Related Apps in the Event-Based Revenue Recognition – Projects app. You can also use other analytics such as "Display Project WIP Details" or "Inspect Revenue Recognition Postings"
  • The example included in this lesson is just a simple illustrative one. There are many other events that influence the recognition of revenue and are not described here, such as down payments or payments on account, billing deferrals and write offs, non-billable costs, and so on.

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