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Revenue Accounting & Reporting (RAR)

use can example
The following example will help you to gain a sound understanding of the transition process in
Revenue Accounting.

The example is based on using the parallel accounting approach with additional accounts. The
opening balance for the source accounting principle indicates a cash balance of 10,000 and an
equity of 10,000 as the opening balance. The transfer date is 31.12.2015.

Under the old accounting standard, the entity can report profits of 2,005, receivables of 2,305 and
deferred revenues of 300. An update on the cash position is not considered in order to simplify the
above example. Equally, other positions such as contract asset, and so on, are not taken into
account. However, they follow the same logic as described below.

In the following scenario, the transition process is outlined based on four contracts in set ups.

In the first contract, there is one performance obligation (POB) for providing a smartphone to the
customer.

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The smartphone has been delivered and invoiced. The total amount is EUR 800. This means that
the contract is completely fulfilled and invoiced under the policy of the old standard.

Under the legislation of the new accounting standard, a new performance obligation (POB) shall be
added for a specific care program assuming that the entity did not have to be accounted for under
the old accounting standard.

This performance obligation is time-based starting with the inception date of the overall contract,
which is before the transfer date.

However, based on the nature of the contract, this time-based performance obligation extends into
the comparative period after the adoption date.

There are also allocation effects between the performance obligation for the device and the
performance obligation for the care program which need to be reallocated under the target
accounting principle revenue in contrast to the source accounting principle.

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This means that the contract under the new accounting standard is actually in a contract liability
status, as it has been fully invoiced but not fully fulfilled.

In the second contract, a subscription order has been partly fulfilled and invoiced. Revenue is
recognized monthly, while the invoicing is performed quarterly. The contract under the old legislation
is not in a deferred state.

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Under the new accounting standard, a free service needs to be included in the allocation. The
service is also time-based but is provided over a time frame of 24 months. Revenue recognition
continues monthly, and invoicing quarterly.

Allocations effects need to be considered under the new accounting standards. This means that only
362,26 are allocated to the service and the residual amount to the service for the overall contract. As
both performance obligations are time-based, the allocation is split up according to the duration of
the performance obligation. By reallocating the costs, the contract is in a contract liability state at the
end of FY15.

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The third contract deals with a compound contract for hardware, including a smartphone and a USB
stick. The contract has been fulfilled and invoiced, however it needs to be included in the transition
process.

Under the new legislation for the contract, the allocation effects that lead to a reallocation of revenue
at the end of FY15 need to be considered.

The last contract is an event-based contract for delivering a material with a quantity of 10. At the end
of FY15, 2 units have been delivered and 5 units invoiced. This means that the contract is in a
deferred state of 300.

No reallocation is required. However, the deferred amount needs to be transferred to contract

liability.

First, the accounts used for parallel accounting need to be prepared. The postings below describe a
typical scenario. However, they may differ from customer to customer. To set up the specific
accounts as part of the preparation tasks, as in the example below of deferred revenue, the entity
posts from the common accounts against an IFRS adjustment account, and vice versa, and the
adjustment effects against the specific accounts for the old and new accounting standard.

Second, the cumulative catch-up is posted by the Revenue Accounting engine. This results in a
debit of 300 to reverse deferred revenue (from Contract Example 4), and a credit of contract liability
of 376 (from Contract Example 1 (66,67), 2 (9,43) and 4 (300,00)).

Revenue adjustments are posted with a debit of 419 and a credit of 343 through the allocation
effects.

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The cumulative catch-up effect on equity in this example is -76 and needs to be posted by the entity
against retained earnings as a follow-on step.

Source – sap.com, sap blogs, sap help

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