Explaining Contract-Based Revenue Recognition

Contract-Based Revenue Recognition can be described by some business examples:

• The customer pays a monthly recurring fee per user in advance. For revenue accounting the amount should be assigned time-based to the appropriate month in the future.
• The customer creates and pays for usage-based support tickets. For revenue accounting, this transaction is assigned event-based to a revenue contract.

Contract-Based Revenue Recognition is processed with the following steps:

• The Contract Identification creates revenue recognition contracts corresponding to operational documents that are created on an operational system.
• The Performance Obligation Identification identifies the performance obligations included in each contract. Performance obligations for items in the operational document are created and their relationships is managed.
• The Transaction Price Allocation determines total prices by aggregating pricing conditions passed from operational systems, and allocates the total price among the performance obligations.
• The Performance Obligation Fulfillment recognizes revenue for performance obligations as they are fulfilled.
• The Revenue Posting are transferred to the general ledger regularly to reflect revenue-related transactions.

The example shows the process flow of contract-based revenue recognition.

The process starts in SAP Subscription Billing with the following functions:

• The Subscription manages usage-based, one-time, and recurring charges.
• The Bill Forecast defines, when an invoice will be created for which amount, for example a three-year contract that is paid annually per position with the same amount.
• The Pre-Bill creates the actual (Pre-)Bill at the end of the year.

The process continues in the SAP S/4HANA Cloud with the following steps:

• [1] The subscription creation in SAP Subscription Billing generates a subscription event, which triggers the creation of a provider contract in SAP S/4HANA Cloud for Contract Accounting and Invoicing with information of the usage-based, one-time, and recurring charges.
• [2] The bill forecast calculation in SAP Subscription Billing triggers the creation of billing plan items in SAP S/4HANA Cloud for Contract Accounting and Invoicing with recurring and one-time billing plan items.
• [3] Out of the provider contract items and billing plan items, so called Order Item Transfer Records (TR) are created for integration into Revenue Accounting.
• [4] The transfer records are sent to the SAP S/4HANA Cloud for Contract-Based Revenue Recognition and create a revenue accounting contract. In this example three performance obligations: the usage item is created event-based, and the one-time and recurring items are created time-based.
• [5] The Usage Fulfillment and Periodic Fulfillment Schedule function of the SAP S/4HANA Cloud for Contract-Based Revenue Recognition post the correct revenue amount in the SAP S/4HANA Finance Cloud.
• [6] The transfer of the Pre-Bill from SAP Subscription Billing to the SAP S/4HANA Cloud for Contract Accounting and Invoicing generates billable items. This starts the billing and invoicing process and the posting of the contract accounting document. The contract accounting document is posted against billed revenue in the SAP S/4HANA Finance Cloud.
• [7] Out of the invoice, so called Invoice Item Transfer Records (TR) are created and transferred to the SAP S/4HANA Cloud for Contract-Based Revenue Recognition. It will do the correction postings to take out the billed revenue and post again the periodic posted revenue from the scheduler.

This example is shown in the following demo.