Introduction to Universal Revenue Recognition

[volkmar_zahn]

Universal Revenue Recognition?

What?

Is this a new solution from SAP for recognizing revenue?

To alleviate any excitement or confusion, it is not entirely new. Instead, it combines the already powerful capabilities of event-based revenue recognition and revenue accounting (also known as contract-based recognition) into a unified revenue recognition capability. As we have numerous revenue recognition customers with diverse needs, the main concept behind universal revenue recognition is to offer a comprehensive solution for all revenue recognition needs in one place.

Let me explain.

In SAP S/4HANA Cloud Public Edition, we offer a revenue recognition platform that comes with pre-delivered content and best practices (scope items) for various end-to-end scenarios and industries, such as projects, sales, services, and subscriptions.

For those who are familiar with the evolution of S/4HANA Cloud Public Edition, it's worth noting that we have been supporting different turn-key scenarios with event-based revenue recognition (EBRR) from the very beginning. EBRR is utilized by industries that prioritize controlling and profitability reporting. It facilitates real-time calculation and posting of revenue and cost adjustments for sales orders, projects, service documents, and provider contracts, enabling real-time matching of costs and revenue. EBRR also includes market segment information for each revenue recognition posting and requires no reconciliation efforts between controlling and finance data since the information is stored in the Universal Journal. Therefore, EBRR is not only essential for revenue recognition but also a prerequisite for margin analysis and the evolution of Universal Parallel Accounting (UPA).

On the other hand, Revenue Accounting has historically been centered on IFRS 15 / ASC 606 external financial reporting and compliance requirements. It specifically caters to industries such as High-Tech and Telco, providing an accounting perspective on customer contracts that differs from the operational view, with a sophisticated revenue accounting contract management system. In S/4HANA Cloud Public Edition, its usage has been restricted to BRIM related scenarios, and as a result, it is positioned as Contract-Based Revenue Recognition (CBRR) rather than Revenue Accounting.

Therefore, our approach is to tailor our solutions to individual use cases in various market segments, rather than applying one complex solution to every scenario. Our goal is to make revenue recognition as simple as possible, while still ensuring it meets all necessary requirements.

We believe this is essential because the needs in sales, project, or subscription scenarios can vary significantly. Professional services, for example, are driven by cost and profitability, where the flexibility in resource-related project billing and the percentage-of-completion (PoC) based on plan data plays a crucial role. On the other hand, for product sales in discrete industries, a strong integration into logistics is necessary, and customers require a correlation between cost and revenue for their revenue reporting. In the high-tech industry, we encounter even greater complexity with IFRS 15 due to contract-based revenue streams and frequent contract changes resulting from upsell or cross-sell scenarios.

Figure 1: Revenue Recognition in SAP S/4HANA Cloud

We also understand that streamlining revenue management and adapting to ever-changing business models are key factors for the success of every company.

Surely, companies utilize revenue recognition solutions to enable and automate compliance.

However, revenue recognition is more than just a legal compliance topic. In addition to the major regulatory changes in recent years from ASC 606 and IFRS 15, many companies are also facing radical disruptions in how customers purchase products and consume services. The traditional product business is now combined with adding services, or it is translated into a subscription business model. These independent sales and service transactions are increasingly being combined into agreements with multiple elements, allowing the company to offer holistic solutions. This puts additional focus on requirements around margin and profitability analysis.

How does Universal Revenue Recognition now come into play?

Universal Revenue Recognition combines SAP’s revenue recognition capabilities to offer a comprehensive solution for managing revenue. The tight integration into accounting and controlling from EBRR and the strength regarding IFRS15, by optionally utilizing the revenue accounting contract management and allocation mechanisms of CBRR. This allows customers to choose the level of support for revenue recognition they need through configuration options. The following illustration shows the data flow for universal revenue recognition.

Figure 2: Overview Universal Revenue Recognition

Starting with SAP S/4HANA Cloud Public Edition 2408, it is now possible to activate Universal Revenue Recognition (URR) for specific stock selling scenarios, service contracts, and fixed-price customer projects. If you choose to implement URR, you will need to consider scope items 3KK and 3VS for Contract-Based Revenue Recognition, in addition to the scope items for your respective integration scenario in Event-Based Revenue Recognition.

The URR functionality is optional and requires activation through expert configuration. This option was chosen to allow for a more controlled roll-out and to gather feedback. Once this initial step is completed, the solution can be configured according to your specific needs.

Revenue recognition rules are defined by EBRR revenue recognition keys, which outline the method for recognizing revenue and its posting rules. The key is derived from the item category and material from the operational document, such as a sales order or service contract. When using URR, you must flag the materials and item categories that participate in the URR process during configuration. This standard configuration is also used in the stand-alone EBRR scenario. If you utilize the URR process, you will also need to add relevant configuration for revenue accounting contract management.

Once that is completed, let's briefly review the process shown in figure 2. More detailed information will be provided in subsequent blogs for the specific scenarios.

Let's begin with a sales order in the Sales and Distribution module. In the sales order, you have entered one or more items which, based on previous configuration, are activated for Universal Revenue Recognition. A corresponding revenue recognition key has been configured and, as you are aware from the EBRR integration, derived from the configuration and stored in the sales order item. Additionally, for the sales order integration, you have defined a standalone selling price (SSP) in the SD pricing configuration through condition type PSAM (Step 1).

If the integration with URR has been properly set up, the integration component is triggered and creates a revenue contract and performance obligations. If you have experience with Revenue Accounting, this step is conducted through Inbound Processing – in SAP S/4HANA Cloud Public Edition, we use the Optimized Inbound Processing. For the revenue contract, the revenue is allocated according to the SSP (Step 2).

Subsequently, the follow-on processes are initiated. For a sales order, this involves the delivery and goods issue, with the cost posting. From the cost posting, revenue is recognized in real-time, similar to EBRR, with the exception that the revenue to be recognized is taken from the allocated revenue in the associated revenue contract. Partial deliveries are also supported. Following EBRR posting rules, revenue is debited to an accrued revenue account against revenue adjustment. In the sales order process, the next step is billing for the delivery. Once again, using the logic from EBRR, the billed revenue is deferred in real-time, debiting the revenue adjustment account against deferred revenue (Step 3).

Revenue recognition is event-driven wherever events are available. However, there is also the regular period-end close. In the case of the sales order integration this triggers the balancing of the balance sheet accounts. For other scenarios, where revenue is recognized over time, revenue is recognized as earned for the financial period. This is the case for a service contract.

In the scenario of Universal Revenue Recognition, a new period-end close application job has been introduced, Run Revenue Recognition – Revenue Contracts, that performs the period end close for revenue contracts and its underlying operational documents, such as sales order, service contract and customer projects (Step 4). As a result, the usual period end close programs you may know from revenue accounting are not required anymore.

All posting are directly posting into the Universal Journal, with revenue contract and performance obligation as attributes in the posting lines (Step 5).

If you're interested, stay tuned for further detailed information on the individual scenarios and how universal revenue recognition will create this ‘one-stop shopping’ revenue recognition experience. This is just the beginning and URR capabilities will be growing steadily over time.

Additional Information from our user assistance you can find here:

Event-Based Revenue Recognition: SAP Help EBRR

Contract-Based Revenue Recognition: SAP Help CBRR

Universal Revenue Recognition:   SAP Help URR