Use Result Analysis Functionality to Meet IFRS Requirements of Revenue Recognition

  • by Kedar Muzumdar, Principal FICO Consultant, Infosys Limited
  • June 14, 2013
Result Analysis functionality in SAP can help you meet the requirements of International Financial Reporting Standards (IFRS) and other accounting principles for recognizing revenues and costs for long-term contracts. Learn how to:
• Use some of the key Result Analysis methods in your SAP system to recognize revenues and costs in a make-to-order business scenario.
• Configure your SAP system to use the Result Analysis functionality
• Carry out the month-end processes for Result Analysis calculation and sales order settlement
Key Concept

Result Analysis is a period-end functionality available in the Cost Object Controlling component in an SAP system to calculate the results (profit or loss) and recognize the costs and revenues for a customer contract as per different accounting principles. Depending on the business scenario, Result Analysis can be performed for a sales order, work breakdown structure element, or internal order as a cost object. It also supports creation of work in process and reserves depending on the Result Analysis method selected.

Many manufacturing companies that operate with long-term contracts in a make-to-order (MTO) business scenario have some specific requirements for recognition of revenues and costs. These requirements are governed primarily by the relevant accounting principles, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), and also the conditions in which the business operates. I explain the key IFRS guidelines for revenue recognition and use of Result Analysis functionality in an SAP system to meet these requirements. The guidelines for revenue recognition are prescribed in International Accounting Standards (IAS), which form part of the body of IFRS.

Note
MTO is a business model or a manufacturing process in which the manufacturing activity starts only after the customer order is received and demand is confirmed. It represents a pull-type supply chain operation in which manufacturing is pulled by demand.

IFRS Guidelines for Revenue Recognition

According to IAS Standard 18.14, “revenue arising from the sale of goods shall be recognized when all of the following criteria have been satisfied:

  • The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
  • The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold
  • The amount of revenue can be measured reliably;
  • It is probable that the economic benefits associated with the transaction will flow to the entity; and
  • The costs incurred or to be incurred in respect of the transaction can be measured reliably”

(Source: The IFRS Foundation, Technical Summary, IAS Revenue, 1 January 2012)

The correct representation of this revenue depends on circumstances, and different computations can all be correct depending on the business conditions. The IFRS Foundation does not provide any industry-specific rules, and the principle-based rules must be applied over all entities and industries. For service contracts, IFRS also requires a percentage of completion (PoC) method to be applied for revenue recognition. If PoC is not possible, no revenue can be recognized unless performance of service is completed.

 

Kedar Muzumdar

Kedar Muzumdar is an SAP-certified FICO consultant and a chartered accountant (CA) from the Institute of Chartered Accountants of India. He has been working as a principal consultant on SAP implementation, upgrade, and support projects involving the new GL, AP, AR, material ledger, product costing, cost object controlling, and profitability analysis for the past nine years.

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Comments

10/18/2013 2:24:46 PM
DN

Great article. very informative

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