Revenue Recognition Configuration in SD Is a Key to Compliance

  • by Ajay Pande, Senior SAP Consultant, Infosys Technologies Ltd.
  • March 15, 2007
To comply with the latest bookkeeping principles and current regulations, such as US-Generally Accepted Accounting Principles and the Sarbanes-Oxley Act, companies are required to post revenue according to a time period. This means that the revenues must be realized in the posting period in which the service was carried out or goods were actually delivered. The R/3 revenue recognition functionality, which you configure in Sales and Distribution (SD), helps to fulfill this requirement of separating the revenue recognition process from the billing process.
Key Concept
Revenue is the sum of invoiced sales without sales tax. You record this in the general ledger — the company reports revenue periodically in an income statement. When you issue invoices for the booked sales, but the service or goods are not yet delivered, the related expenses are not booked. This inflates your profit margin. For this, the revenue recognition process is important to reflect a true picture of the income statement.
Revenue is typically the single largest item reported in a company’s financial statements. As with the bottom line and cash flows, companies’ reported revenues are not only significant to these companies’ financial statements in dollar terms, but also in the weight and importance that investors place on them in making investment decisions. When a company makes revenues from its operations, it must record these revenues in the general ledger (G/L), and then report on the income statement every reporting period.

The revenue recognition functionality in R/3 separates the revenue recognition process from the billing process. This functionality is available with Release 4.6C and in mySAP ERP Central Component (ECC) 5.0 and ECC 6.0. The setup of the revenue recognition function is a joint task by Sales and Distribution (SD) and Financial Accounting (FI) teams, although the configuration setting in SAP falls in the SD area.

SD processes set up and initialize revenue recognition. Therefore you assign the revenue recognition method to an item category in SD customizing. Revenue recognition then affects FI by account postings. This is a deviation from the way standard SAP was initially developed for billing and transferring revenue to FI, which makes implementing revenue recognition trickier. As a result, although the capability has been around for some time, many companies do not take advantage of it. The configuration is poorly understood because has several peculiarities. The process I describe shows you how to navigate through this configuration.

I’ll take you through the four steps of SD and FI customizing to set up revenue recognition. To separate the billing process from the revenue recognition process, you create two additional balance sheet accounts in the FI module for the grouping and monitoring of revenues. To explain the process, I’ll use the example of a service and maintenance contract that is valid for 12 months. For more information about the concept of revenue recognition, see the sidebar “Understanding Revenue Recognition.”

Ajay Pande

Ajay Pande is a senior consultant with the Enterprise Solutions Group of Infosys Technologies Ltd. He has experience in SAP implementation, configuration, and project management at Fortune 500 companies. He has also worked on integrating finance and logistics modules. Ajay holds a bachelor’s degree in mechanical engineering and a master’s degree in industrial engineering.

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