Track Service Contract Prepayments in a Hidden Project System Option
- by Marco Jordy, Vice President of SAP Finance Consulting, ORBIS America, Inc.
- September 15, 2005
A common problem with service contracts is how to account for them correctly in financial statements, taking into account existing customer prepayments and revenue in excess. A customizing setting, hidden in the account determination of the Project System (PS), allows you to generate additional G/L entries to move customer prepayments into the receivables section of the balance sheet.
The multitude of payment options for a service contract poses a problem in results analysis. Prepayments do not generate revenue and are shown under the prepayment section in the balance sheet. However, they change character within the lifetime of the service contract. Over time, services are rendered and therefore revenues are recognized in results analysis. While recognizing revenues, the prepayment amounts should be reclassified to the receivables section of the balance sheet. To automate this reclassification posting, you can use an undocumented feature in the customizing of results analysis and settlement.
One of my clients, a software development company, offers extended warranty and product maintenance contracts for its software. The time frames of the contracts, as well as the payment options for customers, vary widely.
Depending on the contract, customers pay the full order value up front, in intervals, or at the end of the project. Independently of the invoices sent to the customer, my client wanted to recognize the contract revenue in equal amounts for each month within the time frame of the service contract.
Such service contracts recognize revenue in equal amounts over the lifetime of the warranty agreement. Customer payments have to be classified as down payments until the service is provided. The revenue recognition should offset an existing customer down payment. If the revenue recognition overruns the down payment, the remaining amount should be classified as revenue in excess of billings in the inventory section of the balance sheet.
My client wanted the system to carry out all necessary Financials (FI) entries automatically. This included finding the correct balance sheet position for the revenue in excess of billings, which proved challenging. The SAP documentation describes the possibility of finding only one account for revenue in excess, but not multiple accounts, depending upon the existence of a down payment. The project team found a way to set up an additional posting rule in the Project System (PS) customizing setting via transaction OKG8 (define posting rules for settlement to accounting) that solves the problem.
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