Revenue recognition is the main accounting principle affecting an organization’s financial statements. There are various rules and regulations governing this aspect and meeting those is necessary from both a legal point of view and a logical point of view. Learn about special International Financial Reporting Standards (IFRS) requirements for revenue recognition and how they can be integrated with standard SAP result analysis setup.
Reading this article, you will learn:
- International Financial Reporting Standards (IFRS) requirements for revenue recognition
- An overview of SAP-provided methods for revenue recognition
- How to handle special scenarios for determining revenue not met by a standard SAP system
The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) issued IFRS 15 “Revenues from contract with customers” on May 28, 2014. This is an outcome of years of deliberation by regulatory bodies toward getting a convergent financial standard as guidance for the financial statement preparers. The new standard was initially scheduled to be applicable for all annual periods beginning on or after January, 1, 2017, for IFRS preparers. However, on September 11, 2015, the IASB deferred the effective date by a year to January 1, 2018. (Earlier application of this IFRS is also permitted.) IFRS 15 is a principle-based approach used to ensure that an organization recognizes revenue in its financial statements to depict the transfer of goods and services to the customers at an amount that reflects the consideration to which the organization expects to be entitled in exchange for them.
Result analysis functionality of ERP Financials is used for revenue recognition. SAP provides certain predefined methods for calculating revenue and cost. However, you may have some specific business needs to meet for determining the revenue recognition based on the principles defined in International Financial Reporting Standards (IFRS). For example, an organization is doing the work for a client for a month, but the billing is done in the next month, so the matching of revenue and cost for the same period is important.
I cover a few examples of special requirements for revenue recognition and how they can be integrated with a standard SAP result analysis setup.
Understanding IFRS-15 Requirements for Revenue Recognition
The IFRS-15 standard prescribes five core principles that an organization has to apply for the purpose of determining the amount and timing of revenue recognition. Figure 1 diagrams the five-step framework of IFRS-15.