During the lead-up to implementation of the new Revenue Recognition standards, ASC 606 and IFRS 15, companies chose a variety of paths to get ready.
In some cases, they took a long term view and implemented purpose-built solutions such as SAP Revenue Accounting and Reporting (RAR) to achieve compliance, while also laying the groundwork to optimize and transform their financial operations.
However, in some situations, companies simply tried to make as few changes as possible while cobbling together bare minimum compliance approaches. One of these shortcuts used by companies running SAP was to try and squeeze compliance functionality out of existing SAP SD Revenue Recognition functionality running in ECC environments.
From the outset, SD RevRec posed a number of shortcomings with regard to meeting the new requirements, including:
- No Multiple Element Arrangements: SD RevRec does not support allocation of transaction price, one of the fundamental steps for ASC 606 and IFRS 15. Revenue is always recognized separately for every SD order item according to its specific pricing conditions.
- Parallel Accounting: SD RevRec cannot manage different accounting principles, with makes it difficult to leverage automation and increases the effort needed for reconciliation by accounting teams.
- Cost Recognition: Cost of Goods Sold (COGS) is not reconciled with revenue recognized. SD can only recognize cost at the time of PGI or billing, depending on set-up of the pricing scheme in SD.
- Disclosures and Reporting: Tranditional SD RevRec is not capable of meeting the new disclosure requirements for ASC 606 and IFRS 15.
Despite these limitations and the recommendations from SAP that customers transition to RAR, some companies managed to get by with SD RevRec for initial implementation of the new standards.
Unfortunately those companies are now facing another big hurdle in the near future because SD RevRec will no longer be supported as the SAP technology environment moves ahead to S/4HANA. Current estimates indicate that SD RevRec will become dead-ended by the end of 2020.
So, if your company is in this situation, what should you be doing now?
- The first step is to look at implementing SAP RAR as soon as possible. If you have SAP, you already own the RAR solution as part of SAP FICO. Also RAR can be deployed as a RevRec engine for other ERP legacy environments.
- Consult your outside accountants and knowledgeable SAP consultants to define a pilot program running SAP RAR in parallel with existing methods.
- Look into leveraging a purpose-built fast-track approach such as Bramasol's Rapid RevRecReady Compliance Solution.
The most important issue is DO NOT WAIT!
The clock is ticking toward the end of SD RevRec and you're going to need a viable alternative in place!