Dear,
One of the most important elements of Solvency Analysis is Revenue Recognition.
Revenue Recognition has experienced a profound change since the 2008 Financial Crisis, and in particular with the implementation of the IFRS 15 in January 2018.
SAP covered the IFRS 15 requirement with the release of the SAP Revenue Accounting and Reporting solution. You can see a description of it in this blog.
https://www.linkedin.com/pulse/ifrs-9-15-business-case-sap-revenue-accounting-bank-analyzer-frances
From the architecture perspective, the Revenue Accounting and Reporting solution is built as a subledger for the IFRS 15 adjustments. It fulfills the IFRS 15 requirements but presents some opportunities for improvement.
- In case there’s an adjusted relevant item in the SD-Sales Order, the Revenue Accounting and Reporting engine creates a “replication” of the item with the format of a Revenue Accounting and Reporting Contract. The system will use this Revenue Accounting Contract for managing the IFRS 15 Performance Obligations and the IFRS 15 accounting adjustments. To some extent this Revenue Accounting and Reporting contract breaks the SAP Single Source of Truth value proposition.
- The adjustment accounting entries are generated in the Revenue Accounting and Reporting system and posted from there to the General Ledger. But the nominal accounting postings are generated by the standard SAP-SD functionality and posted from there to the General Ledger. The accounting result is correct but the tracking of the postings is split between the SD subledger and the Revenue Accounting Reporting subledger. Consistency is guaranteed because the system keeps the link between the SD-Document and the Revenue Accounting and Reporting Contract but the Revenue Accounting and Reporting documents and postings are not maintained in the SAP SD business flow. The nominal and the adjustment postings are also split in different General Ledger documents.
S/4HANA Accounting is Event-Based, meaning that the accounting postings are available on real time. On the other hand Revenue Accounting and Reporting is periodic, meaning that the IFRS 15 revenue recognition process happens at the end of the period. Having an accounting component available at the end of the period limits the S/4HANA advantages in real time financial analysis and simplification of end-of-period activities.
SAP has overcome these limitations with the release of the new Event Based Revenue Recognition functionalities of S/4HANA Accounting.
Event Based Revenue Recognition follows a different approach than the Revenue Accounting and Reporting system. It has not been built as a separated subledger but as an extension of the functionalities of S/4HANA Accounting.
Integration and reconciliation between the Financial and Management Accounting areas of the company is one of the major achievements of the SAP S/4HANA Finance Architecture. The holistic representation of the Universal Journal as a Central repository of Management and Financial Accounting provides accurate and on-time information of the Legal and Internal Financial Statements, and reducing and accelerating period end-closing activities.
You are also familiar with the multiple advantages of the Universal Journal for facilitating consolidation and planification, including heterogeneous environments with the support of the Central Finance functionalities.
The Universal Journal Architecture of SAP S/4HANA has many more advantages, but there are many other sources where you can find details of these advantages, so I will not expand on them.
The important message is that the Event Based Revenue Recognition of SAP S/4HANA accounting has been built following the principles of the Universal Journal Architecture and it comes with all its advantages.
From a more technical perspective, Event Based Revenue Recognition takes advantage of the Result Analysis Concept which was developed more than 30 years ago, as a central component for the valuation of the Work in Process and other Management Accounting requirements.
This is very logical as the valuation of the Work in Process has been an important element of a company Revenue Recognition process, including concepts like the Percentage of Completion of Performance Obligations, although these terms have taken more relevance since the issue of IFRS 15 regulation.
Event Based Revenue Recognition covers all the IFRS 15 requirements for 4 scenarios; Event-Based Revenue Recognition for Projects, Event-Based Revenue Recognition for Sales Orders, Event-Based Revenue Recognition for Service Documents and Event-Based Revenue Recognition for Provider Contracts. At the time this blog has been written the Event-Based Revenue Recognition for Provider Contracts scenario is only available in the on Cloud release of S/4 HANA but is expected to be available soon in the On Premise release.
The real time and accurate capabilities of Event Based Revenue Recognition, combined with the capabilities of the SAP S/4 HANA Universal Journal provides the strongest backbone for the representation of companies financial health, supporting the continuous improvement of business processes efficiency. Integrating these processes in the allocation of Capital and Liquidity provides the best architecture for Capital and Liquidity Optimization.
We are entering into a new era of Capital Scarcity for two reasons.
1) Excess of debt (the biggest in the history of capitalism) overconsumes Capital.
2) Weakening of economic growth, as a consequence of natural resources scarcity and Energy Transition of the Economic System slows down Capital generation.
If Capital is overconsumed due to excess debt and it is not generated at the same rate due to weak economic growth, Capital becomes scarce. But Capital is the most important resource of the Financial System and if it has become scarce there’s no higher priority than optimizing it.
Consequently, the Financial System has to be transformed from a model based in volume to a model based in Capital Optimization.
The last 12 years our team has worked in modeling all the economic events and business flows represented in the SAP systems of the Real Economy, in terms of Capital and Liquidity consumption and generation. With this information, our systems measure how to offer Financial Instruments for covering Capital and Liquidity gaps or investing Capital and Liquidity surpluses, optimizing the Capital and Liquidity consumption of the system.
We are working on presenting our system to the market, and looking for business partners and investors, if you are interested do not hesitate in contacting me at
ferran.frances@capitency.com
Looking forward to reading your opinions.
Kindest Regards,
Ferran Frances.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
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Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
