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The New Revenue Recognition Standard is here, now what?

By Pete Graham, Director, Finance Solutions and Mobility, SAP

In May 2014, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) issued the new International Financial Reporting Standard (IFRS 15 / ASU 2014-09, ASC 606) which specifies the accounting guidance for revenue recognition. This standard is truly a joint standard of the IASB and of the FASB.   The new standard becomes effective January 1, 2017 in countries adhering to US GAAP and to IFRS.  So, this new standard will impact many companies in every industry and many countries around the world (announcement).

SAP has been actively preparing for this change for several years.  In order to support our customers to be compliant with this new standard, we have now completed a multi-year development effort providing a new standard SAP solution: SAP Revenue Accounting and Reporting 1.0. It specifically addresses requirements derived from this new accounting standard but also generic requirements related to revenue recognition across various accounting principles.  This new solution is now in Ramp-Up.  SAP is rolling out the new solution internally and some scenarios are already being handled in a production environment.  SAP ERP Financials customers with current maintenance agreements will have access to the solution at no charge.

SAP Revenue Accounting and Reporting 1.0 was built from the ground up to handle the new revenue recognition regulation. A cross-functional team comprised of product development and corporate accounting met frequently while the standard was being written to analyze the standard and assess how best to design a new solution to cover the new requirements.  SAP also ran a co-innovation project with over 30 customers to gather input and requirements on the new regulation from our customers’ perspective.  The end result is a solution that automates the revenue recognition and accounting process and simplifies the tasks of revenue accountants in following the new accounting guidelines which are structured in the five following steps:

  1. Identify the revenue contract(s) (combine contracts)
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations of the contract
  5. Recognize the revenue when / as the performance obligations are satisfied.

SAP Revenue Accounting and Reporting manages revenue recognition from a Finance point of view. It decouples operational transactions from accounting. Thus, various operational transactions can be accounted together no matter where the operational data is processed. It literally translates operational transactions into accounting. The main requirement tackled by the new solution is the management and processing of so-called Multiple Element Arrangements. It is now possible to automatically determine these Multiple Element Arrangements from an accounting perspective based on a flexible rules framework. Additionally, accountants have the ability to change the way of how revenues are allocated and recognized manually based on given customer arrangements. SAP Revenue Accounting and Reporting is able to deal with multiple accounting principles and their specifics in revenue recognition and presentation. It also provides analytics for revenue accounting to address legal disclosures and management reporting.

SAP Revenue Accounting and Reporting can also handle multiple accounting standards offering additional flexibility to customers.  And because SAP’s corporate accounting group provided direct feedback to the product development team, the solution was built holistically considering the requirements of revenue accountants even going into the details of transitioning to the new standard.

So what is your call to action?   Brush up on the new standard.  Schedule a meeting with your auditor to discuss the new regulation. Develop a plan to assess your revenue contracts with customers.  Put a project team together. Start evaluating transition options. Listen to the Game Changers Radio show call on September 23, 2014 at 12 PM Noon EST to learn more about the revenue recognition topic. And if you want more information in the future then please check out this link.

Pete Graham Bio