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Sell Printing Machine incl . 100% discounted Setup Service

SAP introduced enhancements to SAP Business ByDesign to allow customers to comply with accounting standard IFRS15/ASC606 revenue recognitions requirements. A series of case documents introduces the key requirements of IFRS15 /ASC606 along with steps to be taken by the client to implement the functionality.

This case document focuses on:

  • Identification of the revenue accounting contract

  • Identification of performance obligations

  • Standalone selling price and revenue allocation

  • Contract assets / contract liabilities

  • Basic posting example over time

Business Scenario – Introduction

Media Productions Limited orders 2 new printing machines incl. setup and installation service. The setup could have been done by the service crew at Media Productions Limited themselves but due to resource constraints they purchased the service offered by the manufacturer of the printing machine. The sales representative of Printing Solution Corp closes the deal by granting a 100% discount on the setup and installation service and a 10% discount on the printing machines, since he expects significant future business.


Situation prior to IFRS15 / ASC606

The company Printing Solutions Corp creates a sales order with 2 items.

The printing machine and service are subject to revenue recognition:

  1. Printing Machine – recognize at delivery

  2. Setup and Installation Service – realize cost immediately

Sales order 1989, assigned to a new revenue accounting contract 1472, before release.

IFRS 15 / ASC606 requirements / ByDesign enhancement and concept

The IFRS 15/ASC 606 standard requires the following five points to be clarified (5-step-model):

  1. Identification of a contract

  2. Identification of performance obligations (POB)

  3. Determine the transaction price

  4. Allocate the transaction price to the performance obligations by usage of fair values as basis for revenue allocation

  5. Recognize revenue when or as entity satisfies performance obligations

Concept: Revenue Accounting Contract / Performance Obligation Assignment

SAP Business ByDesign has enhanced its functionality by introducing a new business object called Revenue Accounting Contract (RAC). It enables within integrated business scenarios using sales orders and sales contracts to assign sales order items / sales contract items to a revenue accounting contract and its respective performance obligations. After activation of the capability (please read the document about implementation considerations), it is enforced to assign sales documents, such as sales orders and customer contracts, to revenue accounting contracts and their items to performance obligation. The next diagram shows the assignment of items to performance obligations.

Elements of sales order 1989 which are relevant for IFRS 15 / ASC 606: assignment to a revenue accounting contract, assignment of items to performance obligations, manually entered discount as a deviation from the price defaulted by price list.

Printing Solution Corp concludes that the printing machines and the service are individual POBs (performance obligations) since the customer could also have setup and installed the machines himself or delegated the task to 3rd party.

The default system behavior of SAP Business ByDesign during sales order creation is like:

  • a new sales order creates a new RAC (revenue accounting contract)

  • every new sales order item creates a new POB (performance obligation)

Following boundary conditions apply:

  • a single sales order / sales contract can only belong to one RAC

  • multiple sales orders / sales contracts can be assigned to the same RAC

The assignment to a POB or an existing revenue accounting contract with this customer can be manually changed during sales order creation process. After release, late changes of the assignment are still possible, but should be done with care.

Concept: The ‘Fair Value’ derivation using standalone selling price (SSP)

The IFRS 15/ASC 606 standards requires the calculation of a fair value for the POBs. The SAP Business ByDesign implementation has opted to derive the standalone selling price at sales order item level and aggregates the sales order item SSPs in case multiple sales order items form a single POB (see also case example: compound POB).

The system will derive, by default, the standalone selling price using the standard SAP Business ByDesign capability for price determination based on pricelists. It also takes regular (non-order specific) discounts for customers or products into account. Freight is not considered.

These values are stored at the inception of the revenue accounting contract. To enforce a separation of concerns the sales representative cannot change the standalone selling price. A revenue accountant though has the capability to manually change the SSP price on sales document level.  Changes like:

  • Quantity change

  • Product change

  • Removal of item / POB

  • Addition of item / POB

trigger a new calculation / derivation of the allocated amount and form a new allocation result. To support the multi-currency capabilities, the derived SSP prices x ordered quantity are converted in the financial accounting view of the revenue accounting contract to the company currency using the currency conversion date of the order inception.

In this example the sales representative enters sales order specific discounts.

Manually changed pricing elements are considered as a deviation from SSP.

By default, no discounts are granted. The non-discounted price (i.e. standalone selling price) would be 200.000 USD + 10.000 USD = 210.000 USD.

The SSP derivation serves as a basis for the revenue allocation across the performance obligation.

In this business example: Weight Factor

  • Weight Factor POB 10: SSP 200.000 USD / Total SSP 210.000 USD = 95,24%

  • Weight Factor POB 20: SSP 10.000 USD / Total SSP 210.000 USD = 4,76%

The logical view on the SAP Business ByDesign Revenue Accounting Contract at this stage:

Allocation of revenue calculation at the revenue accounting contract.

Report Revenue Accounting Contract List - Allocation Base.

When is revenue to be realized?

The IFRS 15/ASC 606 standard requires revenue to be recognized when a customer can ‘benefit’ from the (partial) delivery or (partial) fulfillment of a POB.

The question of when to realize revenue is not new in SAP Business ByDesign. The available revenue recognition capabilities provide means to derive the completion rate automatically (example: delivered quantity or invoiced quantity) or set manually the percentage of completion.

The SAP Business ByDesign reuses for the IFRS 15/ASC 606 enhancement existing means of accrual methods at sales order item level. In many cases 1 sales order item matches exactly 1 RAC POB item. Then the accrual method on the sales line item determines when to realize revenue.

In case where multiple sales line items form a POB, specific rules and constraints must be taken into consideration. In a later case document these aspects will be highlighted.

SAP Business ByDesign customers using existing revenue recognition methods will need to revisit their accrual derivation methods according to the IFRS 15/ASC 606 criterion that a customer 'can take benefit from a POB.’

The accrual method assignment decides on when to realize cost and revenue.

ByDesign implementation design decision / implications

In SAP Business ByDesign it has been decided to keep the journal entry granularity at sales document item level. This also applies for the SSP derivation based on standard ByDesign CRM Price List functionality. The IFRS 15 /ASC 606 standard does not require this granularity; it enforces the correct postings at contract level. SAP Business ByDesign will allow this by aggregation across the assigned sales order items / POBs / RAC assignment.

The benefits of this approach for ByDesign customers

  • For internal financial reporting purposes the sales order line item granularity is still available.

  • Product and sales order profitability are at the same detailed level available as before.

  • Customers can build their IFRS 15/ASC 606 implementation based on their established sales order processes and sales contract processes. They do not have to establish new core business processes. However, customers must revisit how they use the current sales orders and sales contracts and probably will need to adapt their processes to fulfill their compliance issues.

  • Existing order fulfillment, invoicing and payment processes are not affected unless customers decide to adjust their business behavior to comply to IFRS 15 /ASC 606 requirements. Invoices, time confirmations, service confirmations, goods issues post to deferral G/L accounts during the fiscal period.

Note / considerations for SAP Business ByDesign customers

Prior to activation of the enhancement functionality, SAP Business ByDesign customers should have gone through a clear change project considering the changes required to meet the business and system requirements for IFRS 15 / AS606.

  • Mandatory usage of sales orders and/or sales contracts

  • Discounts should be entered with respective price components (item discount, overall discount). The list price should not be changed in the order, but instead discounts should be used to reflect the proper pricing.

  • Background: The amounts posted at G/L Accounts ‘discounts’ are only affected by respective price components in the sales document.

  • Price lists maintained with fair values for SSP derivation

  • Interaction and training with sales department and accounting department on alignment and rules to identify and form POBs and revenue accounting contracts

  • Agreements in place for best practice for order specific price adjustments.
    Best practice is using order specific discounts.

  • See the shift in internal reporting for revenue (example: to meet IFRS 15/ASC 606 requirements, the SAP Business ByDesign system will require that revenue will be shown on the product ‘Setup and Installation Service’ in addition to the ‘Printing Machine’. Prior the IFRS 15/ASC 606 only revenue would have been shown on the ‘Printing Machine’ sales order item level.)

  • Revisit accrual method derivation for existing revenue recognition.  The customer should plan for any required changes.

Simplified Posting Example

Period 9 - sales order creation

The 2 printing machines are to be delivered in period 3. The ‘Setup and Installation’ should take place the day after delivery and scheduled to take 2 days. A new Revenue Accounting Contract is created as illustrated above. Accrual methods for both items are "at point of delivery".

Period 10 - delivery of two printing machines (8 days late)

The goods issue is posted late in period 3. The simplified posting debits ‘Deferred Costs’ and credits ‘Finished Goods Inventory’. The inventory valuation is at 70.000 USD per printing machine. Only the sales order item 1989-10 is referenced in the journal entry line.

Posting for the delivery of the printing machine.

Period 10 – Revenue Recognition Run

In period 10 revenue recognition takes place for the revenue accounting contract. The resulting journal entry would deliver following simplified journal entry lines

Based on the accrual method for sales item 1989-10 ‘At delivery’ the system calculates a Progress Indicator of 100% for POB 10.

Posting for the revenue recognition run.

  1. Sales revenue and sales discounts are realized on basis of the RAC allocation basis.
    Note that using discounts in the sales order items leads to dedicated G/L accounts.

  2. Since no invoice has been issued so far the line item ‘Unbilled Receivables’ is created on basis of the net value of the sales order.

  3. Since now the ‘Unbilled Receivables’ = 180.000,00 USD exceeds the ‘Earned Net Value’ = 428,57 USD an additional line with ‘Contract liabilities’ 8571,43 USD (180.000,00 USD  -  171. 428,57 USD) is created.

This is also visible in report Revenue Account Contract List - Key Figure Overview.

Situation after revenue recognition in report Revenue Accounting Contract List - Key Figure Overview.

Period 11 - goods and service acknowledgement

The setup and installation is done after the 2 machines have been delivered. The service crew confirms in period 4 the work by entering a goods and service acknowledgement (GSA).  This leads to a financial posting in the system like:

Posting for the service delivery.

In this example the GSA posts 5.760,- USD for service fulfillment to ‘Deferred Costs’.

Period 11 - Invoicing two printing machines and Setup and Installation Service

In period 4 the entire sales order is fully invoiced.

The invoice has been issued without changes to what has been proposed from the sales order.

The resulting journal entry is shown below:

Posting for the customer invoice. It posts to balance sheet position "Deferred Revenue", which is used only as an interim account when functionality "revenue accounting contracts" is active.

Period 4 - final revenue recognition run

The final revenue recognition run creates this simplified journal entry.

Posting for the revenue recognition run.


  1. The % of progress for both sales order items, POBs has been calculated at 100%.

  2. For sales order item 1989-20 ‘Setup and Installation’ and performance obligation 20 earned revenue has to be realized: 8.571,43 USD on basis of the allocated amount. This results in 2 journal entry lines realizing ‘sales revenue’ = 10.000,00 USD and ‘sales discounts’ = 1.428,57 USD.
    Note: the revenue for the 2 printing machines had already been realized in the prior revenue recognition run.

  3. The revenue recognition run takes the now invoiced amount into consideration. ‘Deferred Revenue and Discounts’ created during invoicing are now cancelled out. The item ‘unbilled receivables’ = 180.000,00 USD created by the revenue recognition run in the prior period is cancelled out as well.

  4. Finally, ‘contract liabilities’ and ‘contract assets’ no longer exist. The ‘contract liability’ line in the journal entry balances the contract liability G/L account for the revenue accounting contract.

Situation after invoice and final revenue recognition run: sales revenue is fully realized, unbileed receivables, contract assets and unbilled receivables clears to zero at revenue accounting contract level.

Note: SAP Business ByDesign balancing and clearing happens on the sales order item level to assure a proper increase, reduction of contract assets / contract liabilities. This is far more granular than the IFRS 15/ASC 606 standard requires. The enhancements in SAP Business ByDesign assure that the proven profit center reporting and granular profitability analysis are still supported.


Sales Ledger Postings

Postings Splitted by Periods

To create this blog, I had to post into the future. This comes with a special behavior of how the rev rec run determines selection and posting dates (as described here). For this reason, I had to run the first run in November and the last one in December. So, I've extracted the report shown above to Excel and added the period end results manually, for a better understanding.

In real life, this wouldn't be necessary, because no one would do revenue recognition for future periods.

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