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Revenue recognition management provides automation to help accounting and finance professionals comply with International Financial Reporting Standard (IFRS) 15 and Accounting Standards Codification (ASC) 606.

New capabilities will include support for product bundles and kits such as:

• Software and maintenance
• Software and services
• Software
• Hardware and service

These capabilities will handle deferred revenue, recognition schedules, subscriptions and renewals, and forecasting and reporting.

Knowing the revenue recognition process helps you be aware of how much a project costs. Different methods are available for creating an estimate and determining the cost of a project. Occasionally, when there are mistakes, you can return and recall estimates to fix the issues. All businesses need to know the process of revenue recognition to manage their costs and growth.

In July 2017, software and device giant Microsoft adopted a new accounting standard that market observers described as one of “the most historic accounting changes to hit the U.S. capital markets in decades.” Twelve years in the making, the Financial Accounting Standards Board’s (FASB) 2014-09 Revenue from Contracts with Customers (Topic 606) laid out new rules for making revenue recognition consistent across industries, both in the U.S. and internationally through its International Financial Reporting Standards (IFRS) equivalent, IFRS 15.

While implementation of the standard, beginning in fiscal year 2018, would have an impact on many industries, perhaps the greatest effect would be felt by software companies, where “multiple-element arrangements” that bundled software licenses, upgrades, and post-contract customer support or services were ubiquitous.

This case focuses on helping students understand the updated standards for revenue recognition, both in the U.S. through Financial Accounting Standards Board’s (FASB) 2014-09 Revenue from Contracts with Customers (Topic 606), and internationally through the International Financial Reporting Standards (IFRS) equivalent, IFRS 15.

Business value

Advanced revenue recognition lets you manage revenue in compliance with ASC 606 and IFRS 15 accounting standards. This feature will enable revenue recognition on document types beyond sales orders allowing greater control of revenue.

Managing deferrals at the line-item level puts you in control of the revenue recognition process. Having an automatic process helps reduce mistakes that can creep in through manual processes and saves time.

Feature details

Advanced revenue recognition lets organizations eliminate manual processes or external systems by allowing users to manage revenue in one system. Real-time reporting provides insights into critical information, such as monthly recurring revenue.

Once an item is set up as deferrable, the deferral schedule is automatically created when items are added. Templates can be predefined to create different types of deferral schedules, such as monthly, quarterly, or schedules that are based on specified dates. One process allows all current deferral schedules to be recognized quickly.

Principal versus Agent:

Software Reseller (IFRS 15 Revenue from Contracts with Customers) The Committee received a request asking whether, in applying IFRS 15, a reseller of software licences is a principal or agent. In the fact pattern described in the request:

a. the reseller has a distribution agreement with a software manufacturer that:

i. gives the reseller the right to grant (sell) the manufacturer’s standard software licenses to customers;

ii. requires the reseller to provide pre-sales advice to each customer—before the sale of the software licenses—to identify the type and number of software licenses that would meet the customer’s needs; and

iii. provides the reseller with discretion in pricing the software licenses for sale to customers.

b. if the customer decides:

i. to buy no software licenses, it pays nothing. The reseller and the customer do not enter into an agreement.

ii. to buy a specified type and number of software licenses, the reseller negotiates the selling price with the customer, places an order with the software manufacturer on behalf of the customer (and pays the manufacturer), and invoices the customer for the agreed price.

c. the software manufacturer provides the customer with the software licenses ordered—issued in the customer’s name—via a software portal and with the key necessary for activation. The software manufacturer and the customer enter into an agreement specifying the customer’s right to use the software, a warranty covering the software’s functionality and the term of the license.

d. if the reseller advises the customer to order an incorrect type or number of software licenses (that fails to meet the customer’s needs), the customer may not accept the licenses. The reseller is unable to return unaccepted licenses to the software manufacturer or sell them to another customer.

Applicable requirements in IFRS 15—Principal versus agent considerations Paragraphs B34–B38 set out a framework to determine whether an entity is a principal or agent. When another party is involved in providing goods or services to a customer, an entity determines whether the nature of its promise is a performance obligation to provide the specified goods or services itself (the entity is a principal) or to arrange for those goods or services to be provided by the other party (the entity is an agent). Paragraph B34A states that determining the nature of its promise requires an entity to: a. identify the specified goods or services to be provided to the customer.

A specified good or service is a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer (paragraph B34); and b. assess whether it controls each specified good or service before that good or service is transferred to the customer.

An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer (paragraph B35). An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer (paragraph B36). Identifying the specified goods or services to be provided to the customer

The first step in identifying the specified goods or services to be provided to the customer is to assess the goods or services promised in the contract with the customer. A contract with a customer generally explicitly states the goods or services that an entity promises to provide to a customer.

However, the contract may also include promises that are implied by an entity’s customary business practices, published policies or specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will transfer a good or service to the customer.

Key insights

• ??The new global revenue recognition standard, ASC 606 in US GAAP and IFRS 15 in IFRS, provides a five-step approach for recognizing revenue, ensuring consistency and transparency in financial reporting.
• ??The annual report of Microsoft highlights the complexity of their contracts with customers, which often involve promises to transfer multiple products and services.
• ??Microsoft's balance sheet holds $37 billion of unearned revenue, highlighting the importance of accurately recognizing revenue when performance obligations are satisfied.
• ??Revenue is recognized upon transfer of control of products or services to customers, emphasizing the importance of delivering the product or performing the service.
• ??The software world is shifting towards "software as a service" models like Office 365, where customers pay a subscription fee and receive continuous updates and new features, rather than buying one-time software packages.
• ??Revenue recognition for Microsoft's software product, Windows 10, is mostly recognized upfront, except for software updates which are recognized ratably over the estimated life of the device or license.
• ??Revenue recognition for cloud services can be complex, as it depends on whether they are sold on a subscription basis or a consumption basis.
• ??The process of revenue recognition involves following a five-step process and applying judgment and estimates when necessary, emphasizing the importance of careful accounting practices in determining revenue.

JOBS

No one in the market know what is IFRS 15 yet. Yes, the demand vs supply between the jobs and candidates who can deliver IFRS 15 is high.

What it needs to get into IFRS 15 / SAP RAR job market?

Courage to make it look eazy. Yes, I want you to make it look eazy. It is not a easy task to simplify IFRS 15 for existing accounting people.

TCS / Wipro / HCL are looking for 100's if not 1000's of people with this skill.

Please let me know if you need free mentoring in this area.

Thanks,

Your SAP Well Wisher!!!