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IFRS Ready? Revenue Recognition from Contracts with Customers

by Kent Bettisworth

September 20, 2010

IFRS Ready? On June 24, 2010 IASB and FASB released an exposure draft proposing new revenue recognition guidelines for Revenue from Contracts with Customers.  Comment letters are due no later than October 22, 2010.  The draft represents a converged standard to essentially replace IAS11-Construction, IAS18-Revenue Recognition, and ASC605-Revenue Recognition standards.  Pay attention as your revenue project accounting may change particularly for those in the construction and technology industries!

Why a new standard? Revenue is a crucial number to financial statement users.  Current US GAAP results in different accounting by industry while current IFRS requirements are difficult to understand and apply.  The new standard will remove inconsistencies in existing standards; provide a more robust framework for addressing issues; improve comparability across companies, industries, and capital markets; simplify financial statement preparation; and clarify accounting for contract costs.

Who would be affected? Any entity that enters into contracts to provide goods & services will use the new standard to account for revenue.  The effective date and transition period is to be determined after mid-year 2011.
 
What is the core principle?  An entity will recognize revenue when control of goods and services, referred to as performance obligations, are passed to the customer.
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Steps to apply the principle are:
  • Identify the contract(s) with the customer
  • Identify the separate performance obligations
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations
  • Recognize revenue when the performance obligation is satisfied

What does this mean for my SAP solutions?
First and foremost, you must thoroughly evaluate your Project Systems result analysis keys. The results analysis settings including calculation type, profit indicator, and evaluation parameters must take into account the allocation of the transaction price to each distinct performance obligation.  Take a look at your configuration settings  with transaction OKG3-RA keys found under SPRO > Project System > Revenue and Earnings > Automatic and Periodic Allocations > Results Analysis > Edit Results Analysis Keys and Version > Define Valuation Methods.

Revenue project statuses must trigger revenue recognition only when control of the goods and services, identified by a distinct performance obligation, have passed to the customer.  For certain construction industry projects this may appear problematic in determing when the customer controls Work-in-Progress. The use of POC methods might seem excluded, however, the IASB/FASB boards have reinforced their desire to recognize revenue sooner rather than later in the inc ome statement, and have provided additional guidance for the construction industry scenarios.  Take a look at your configuration settings  with transaction OKG2-Versions and OKG8-Financial Posting Rules found under SPRO > Project System > Revenue and Earnings > Automatic and Periodic Allocations > Results Analysis > Edit Results Analysis Keys and Version.

In addition, if the transaction price of performance obligations are inter-dependent between multiple contracts, the contracts may need to be combined.  This may influence how you create and manage your customer projects in SAP.

Where can I find additional resources?

- IASB/FASB Public Roundtables Schedule
http:/www.ifrs.org/News/Announcements+and+Speeches/roundtables+2010.htm

- FASB/IASB Revenue Recognition Webcasts
www.fasb.org/cs/ContentServer?c=Page&pag... Recognition Webcasts

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