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Relevant for SAP S/4HANA Cloud Public Edition 2408.
Co-authored by Volkmar Zahn, Frank Hennrich, Gerold Wellenhofer and Chenchu Zhong.
In this blog post, we would like to share with you the new automatic loss handling feature with Event-Based Revenue Recognition (EBRR) for project-based service and project-based sales scenarios. This exciting innovation has been made available with the release 2408.
Scope Introduction
Companies aim to make profit from contracts. However, in some cases, the costs associated with a contract can surpass the potential revenue from the contract, leading to a loss. International accounting standards, such as IFRS, provide specific guidance for such scenarios. In principle, the imminent loss reserves for a loss-making contract must be built as soon as it is foreseen that estimated costs exceed the estimated revenue that will be earned under the contract.
What we offer in EBRR since years to address this requirement is a manual processing of imminent loss handling. In the Event-Based Revenue Recognition – Projects app, you can use the Enter Manual Contract Accruals feature to post Reserves for Imminent Loss manually. As seen in the screenshot below, 100 EUR of Manual Reserves for Imminent Loss Reserves have been posted to the project using the Enter Manual Contract Accruals feature.
The field Manual Contract Accruals (Balance Sheet) in the section Manual Contract Accruals on the Balance Sheet tab shows 100 EUR of Manual Imminent Loss Reserves, representing the contract liability. The field Manual Contract Accruals (Income Stmnt.) in the Adjustments section on the Income Statement tab displays -100 EUR of Manual Adjustment of Reserves for Imminent Loss.
Figure 2: Manual Imminent Loss Reserves in the Event-Based Revenue Recognition-Projects app
After the project is completed, the balance of Manual Imminent Loss Reserves will be cleared during the next period-end closing.
With the release CE2408, the automatic loss handling process feature has been released for revenue recognition scenarios: Project-Bases Services (1IL, 1P0, 33O) and Project-Based Sales (4GQ, 4GR, 4GS). This particularly applies to the revenue recognition key SPFC for project-based services, and the revenue recognition keys EPMFC & EPMFR for project-based sales. The underlying revenue recognition methods which support automatic loss handling are the cost-based POC method and the revenue-based POC method. The posting logics for each method are illustrated with the following T-account examples:
System Walkthrough – Automatic Loss Handling in Project-Based Sales
Now let’s delve deeper into the functionality using the example of a revenue-carrying enterprise project with an anticipated loss. The project is created to collect costs and revenues for selling project-based solutions with sales orders. The project uses the revenue recognition key EPMFC, which is utilizing a cost-based PoC revenue recognition method.
Figure 5: Project Control - Enterprise Projects app
Due to unforeseen events, the costs of materials and labor have risen significantly, and the newly estimated contract costs exceed the contract revenue, and the contract turns to a loss making one.
In this example, we use the Import Financial Plan Data app to bring in the most up-to-date plan data for the project. Once the data has been successfully imported, we then proceed to review the Financial Data for the project. The project has 1500 EUR of planned revenue and 2000 EUR of planned costs. Therefore, the project is identified as a loss-making project.
Figure 6: Financial Plan Data for Project
During the EBRR period-end closing, initial reserves for the imminent loss are calculated and created. In this example, we use the Revalue feature in the Event-Based Revenue Recognition – Projects app to re-evaluate the project. The system calculates the imminent loss reserves according to the plan values in the leading ledger. In the Revalue screen, we see 500 EUR of Imminent Loss Reserves under Liabilities and corresponding -500 EUR of Adjustment Imminent Loss Reserves under Adjustments.
Figure 7: EBRR Simulation Results for Creation of Imminent Loss Reserves
The simulation results have been posted to the project and the values have been refreshed in the Event-Based Revenue Recognition – Projects app.
In the execution phase, EBRR adjusts the imminent loss reserves based on the percentage of completion of the project.
In this example, the goods are delivered to the client.
Figure 9: Posting of Goods Issue
Upon posting the goods issue, 250.11 EUR of actual costs have been posted. In real-time, Event-Based Revenue Recognition calculates the recognized revenue according to the revenue recognition key EPMFC, which recognizes revenue on cost-based POC:
Percentage of Completion (POC) = actual costs / planned costs = 250.11 EUR / 2000 EUR = 12.5055%
Recognized revenue = POC × planned revenue = 12.5055% × 1500 EUR = 187.58 EUR
The screenshot shows the updated values of actual costs, accrued revenue and recognized revenue in the Event-Based Revenue Recognition – Projects app.
Figure 10: Recognized Revenue upon Posting of Goods Issue
During period-end closing, EBRR calculates the consumption of the imminent loss reserves based on the percentage of completion. In this example, we use the Revalue function to re-evaluate the project.
Consumption of Imminent Loss Reserves = POC × Imminent Loss Reserves = 12.5055% × 500 EUR = 62.53 EUR
Remaining Balance of Imminent Loss Reserves = 500 EUR – 62.53 EUR = 437.47 EUR
The values of Imminent Loss Reserves and Adjustment of Imminent Loss Reserves are updated in the Event-Based Revenue Recognition – Projects app.
Now, a billing document is sent to the client, with the billing amount of 1500 EUR.
Upon posting of the billing document, EBRR creates an invoice correction posting in real-time. The screenshot shows the updated values of Billed Revenue, Deferred Revenue and Revenue Adjustment.
The project has now been set to completed.
A period-end closing has been scheduled for the project in the Run Revenue Recognition – Projects app.
Figure 16: Run Revenue Recognition - Projects app
The results of the Output show that revenues and costs have been recognized for the project. Imminent loss Reserves and Adjustment of Imminent Loss Reserves are balanced to zero.
Let’s review the journal entries that have been recorded for the project in this example.
Figure 18: Journal Entries of Imminent Loss Reserves
The journal entries are grouped by the reference documents. The business transaction type TBRR indicates the journal entries are posted by Event-Based Revenue Recognition.
The journal entry 100191845 is recoded during the first period-end closing (using the Revalue feature). It creates the initial imminent loss reserves of 500 EUR for the project. The SLA line item type 8300 indicates that this is the creation of the imminent loss reserves.
The journal entry 100191868 is recorded during the second period-end closing (using the Revalue feature). It is for the consumption of imminent loss reserves after the posting of goods issue. The SLA line item type 8301 shows that this is the consumption of the imminent loss reserves.
The journal entry 10019883 is recorded during the third period-end closing (using the Run Revenue Recognition – Projects app) after the project has been completed. The remaining balance of imminent loss reserves is zeroed out as revenues and costs are fully recognized.
Activation of Automatic Loss Handling in Event-Based Revenue Recognition
To activate automatic loss handling, a few customizing settings must be configured.
First, go to the SSCUI Maintain Settings for Event-Based Revenue Recognition (ID 102530)
In the step Assignment Rules, choose the pre-delivered assignment rule for automatic loss handling processing. In case you require the functionality of automatic loss handling for customer projects, select the assignment rule COSTPOCL. In case the automatic loss handling for revenue-carrying enterprise projects is needed, select the assignment rule EPMCCCL. The assignment rules COSTPOCL and EPMCCCL are available by default since 2402. For customers who went live before 2402, please request the content via expert configuration. Next, proceed to the Assign Sources and Posting Rules step. Here, set up the G/L accounts for the line with the usage 300: Loss processing to capture the automatic imminent loss reserves. Specific G/L accounts should be utilized for the usage 300 to prevent any impact on the manual loss processing using the usage 301, if applicable.
Please note, it is necessary to update Financial Statement Version (FSV) YPS2 and assign the G/L account Adjustment of Imminent Loss Reserves to the tag ADJ_COS. Assignment of the B/S account for imminent loss reserves is not required to the Financial Statement Version YPS2, as reporting is taken care by SAP.
In the Recognition Keys step, choose the supported revenue recognition key for automatic loss handling and assign the assignment rule for automatic loss handling to the selected revenue recognition key. For example, in the screenshot, the recognition key EPMFC is selected. Then, you click Company Code and Accounting Principle Settings, and assign the assignment rule EPMCCCL to the company code 1010 with the accounting principles DEAP and IFRS.
In the Document Types step, change the Loss Handling from Manual loss handling to 3-Automatic creation and usage (closing).
If you require to deactivate automatic loss handling, you must first clear the balances of the imminent loss reserves for ongoing projects before reverting the configuration to manual loss handling. Please follow these steps:
- Set the project status to completed.
- Run the period-end closing, which can be done in the Run Revenue Recognition – Projects app, to clear the open balances in Event-Based Revenue Recognition for the impacted projects across all ledgers and accounting principles.
- Change the assignment rule back from EPMCCCL to EPMCCC for the revenue recognition key EPMFC. To avoid issues, make sure that the balances for the values in Event-Based Revenue Recognition have been cleared during the period-end closing.
- In the Document Types step, change the Loss Handling setting back from 3 Automatic creation and usage (closing) to Manual loss handling for the corresponding company codes and accounting principles. Before making this change, it is important to ensure that there are no assignment rules EPMCCCL or COSTPOCL assigned to any revenue recognition key and accounting principle.
- Set the project status back to released.
In summary, the automatic imminent loss handling feature offers you a streamlined way to identify the projects with anticipated loss and immediately reflects this in your financials, supporting you in compliance with the requirements from international accounting principles.
