Introduction
This blog helps you provide a brief understanding of SAP RAR and IFRS 15 (International Financial Reporting Standard) - Revenue from Contracts with Customers.
Overview
In SAP, RAR typically refers to "Revenue Accounting and Reporting"
It's a module within SAP S/4HANA designed to handle revenue recognition processes in compliance with various accounting standards, such as IFRS 15 and ASC 606. In short, it’s a solution from SAP to take care of IFRS-15 related Regulations.
RAR is also used to comply with ASC 606 - Revenue from Contracts with Customers.
RAR helps organizations manage revenue recognition, ensuring accurate and timely accounting for revenue generated from sales transactions.
It ensures revenue is recorded correctly, even when contracts involve multiple deliverables or long-term services.
Revenue recognition in the ECC SD component becomes obsolete in the SAP S/4HANA, SAP RAR is the recommended option
Before SAP S/4HANA 1809, the SAP Revenue Accounting and Reporting (RAR) solution was available as an add-on. However, starting with SAP S/4HANA 1809, RAR is no longer an add-on but an embedded part of the core SAP system.
Previously, integrating RAR components and transferring data from SAP SD to RAR posed significant technical challenges. With the introduction of embedded RAR functionality, these complexities have been reduced, making the integration process more seamless in SAP S/4HANA 1809 and later versions.
Key Features of SAP RAR
Contract-Based Revenue Recognition
Instead of recognizing revenue based on invoices, SAP RAR identifies performance obligations in a contract and recognizes revenue when those obligations are fulfilled.
Multi-Element Arrangements
If a contract includes multiple deliverables (e.g., software, services, support), RAR splits revenue based on allocation rules.
Recognize Revenue Over Time or at a Point in Time
If revenue is earned over time (e.g., subscription services), RAR defers revenue and recognizes it periodically.If revenue is earned immediately (e.g., product sales), RAR posts it instantly.
Automated Revenue Processing
SAP RAR automates revenue deferrals, reallocation, and postings, reducing manual work and errors.
Control and Performance Obligation Management:
SAP RAR supports tracking the transfer of control of goods or services to customers and manages the recognition of revenue as control is transferred.
Flexible Adjustment & Reallocation
Allows revenue adjustments if contract terms change (e.g., cancellations, modifications, discounts).
Integration with Other SAP Modules
SAP RAR works closely with:
SAP SD (Sales & Distribution) – Sales orders and billing
SAP FI (Finance) – General ledger postings
SAP CO (Controlling) – Cost allocation and profitability
SAP BRIM (Billing and Revenue Innovation Management) – Complex billing scenarios.
Real-Time Reporting & Compliance
Provides revenue reports for auditors, finance teams, and regulators to ensure compliance with IFRS 15 / ASC 606.
IFRS 15 follows a five-step framework for recognizing revenue from contracts with customers. These steps provide a structured approach to determine when and how revenue should be recognized.
Identify the contract with a customer: Determine whether a valid contract exists between the company and the customer. The contract should have commercial substance, clear terms, agreed-upon rights and obligations, and the ability to identify the payment terms.
Identify the separate performance obligations in the contract: Identify the distinct promised goods or services that the company has committed to transferring to the customer. Performance obligations are distinct if the customer can benefit from them on their own or with other available resources, and they are separately identifiable in the contract.
Determine the transaction price of the contract: Determine the amount of consideration (payment) the company expects to receive in exchange for fulfilling its obligations under the contract. Consider variable considerations, such as discounts, rebates, bonuses, or performance-based payments.
Allocate the transaction price to the separate performance obligations in the contract.: Allocate the transaction price to each distinct performance obligation based on its relative standalone selling price. If the standalone selling price is not directly observable, companies can use estimation methods to determine it, such as cost plus a reasonable margin or using comparable observable selling prices.
Recognize revenue when (or as) the performance obligation is satisfied: Recognize revenue when control over the promised goods or services is transferred to the customer. Control is typically transferred when the customer obtains the ability to direct the use and obtain the benefits from the goods or services.
Terminologies in SAP RAR
It is also good to know some of the IFRS 15 specific terminologies.
Performance Obligation: A promise to delivery a good or service under a contract with a customer qualifies as a performance obligation if the good or service is ‘distinct’.
Standalone Selling Price: The price at which an entity would sell a good or service separately to a customer.
Contract Asset: Recognized Revenue is more than the Invoiced Amount.
Contract Liability: Invoiced Amount is more than Recognized Revenue.
