EDUCAÇÃO E TECNOLOGIA

Revenue Recognition as per IFRS15 (Provisional/Differential Invoicing)

Background 

In commodity-based industries such as OIL, Metal arrangement are often made with customers to calculated invoice based on market price which given by commodity exchange markets (Platts, CME, LME, NYMEX). If product is delivered before the average pricing, it is necessary to create a Provisional Invoice. When average pricing has ended and Final Price is known, the price difference is invoiced by creating a Final Invoice. 

 

Abbreviations 

CME – Chicago Mercantile Exchange 

LME – London Metal Exchange 

NYMEX – New York Mercantile Exchange 

 

User Story 

Varsha is an analyst who is responsible for invoicing the customer orders. Varsha reaches to Anna who is responsible for getting the contract / Purchase Order / Sale Order with customers for price determination on Invoice. Since the product which is to be invoiced is a commodity, there is a challenge on determining the price. Anna has only the contract price, however Varsha needs the final price which customer must be invoiced.  

 

Business Requirement 

Commodities such as Oil or metal to be invoiced at price determined by commodity exchanges. The product which is to be invoiced to customer is metal (Copper), the price of copper to be determined based on LME (London Metal Market) price. When a contract or Sales order is agreed with customer the price is always determined as “Price as per LME on delivery date” or average rate. As there is a lead time in delivery of metal to customer location would take couple of months. 

Accounting Entries Expected 

  1. Order/contract Date 15-Sep-2021 (Price 1999 USD) 

Dr. Customer with spot price or agreed price on the order – 1999 USD 

Cr. Sales Revenue / Provisional Revenue – 1999 USD 

      2. Delivery Date 8-Oct-2021 (Price 2010 USD) 

Dr. Customer with spot price (Delivery Date) with differential value – 11 USD 

Cr. Sales Revenue / Provisional Revenue – 11 USD 

      3. Final Price on date 31-Oct-2021 (Price 1990 USD) 

Dr. Sales Revenue / Provisional Revenue – 20 USD 

Cr. Customer with Final price with differential value – 20 USD  

Net effect in accounting revenue with differential billing in SAP. 

Dr. Customer with price on 31-Oct-21 – 1990 USD 

Cr Sales Revenue 1990 USD 

Varsha and Anna reach out to IT solution Architect Jessie.

SAP Solution 

Jessie IT Architect proposes the following SAP solution 

Provisional pricing under IFRS 15 

Some contracts may contain provisional pricing features under which the transaction price is based on the spot rate of the commodity at the payment due date. This may be later than the date at which the performance obligation is satisfied. In contrast with the scenarios discussed, variability arising solely from changes in the market price after control transfers is not subject to the variable consideration guidance in the standard. This is because at the delivery date a receivable already exists, and it is in the scope of the financial instruments standard’. 

Source: KPMG Revenue IFRS 15 Handbook 

Differential Billing Document 

The differential billing document is an intermediate stage between the provisional and final billing documents. It creates an item pair that represents the difference for each delivery item or sales order item. First, the system creates a normal billing item in accordance with current pricing. Then the immediately preceding billing document item for the delivery item or sales order item is determined and copied with a negative value to the billing document. The differential billing document leaves the billing status of the delivery item or sales order item with B = Partially processed. You can define as many differential billing documents as you need. 

In the standard delivery, there is no distinction between provisional and differential billing documents. In each case, the system tries to determine the preceding billing document item. If none is found, the billing document for this delivery item or sales order item is a provisional billing document, otherwise it is a differential billing document. If multiple delivery items or sales order items are billed in one billing document, this billing document can be a combination of single items and differential item pairs. 

Source: – help.SAP.com 

Final Billing Document 

The final billing document creates an item pair, like the differential billing document. It sets the billing status of the delivery item or sales order item to C= Completely processed. 

You can also omit the provisional billing document and create the final billing document directly, it then creates only one billing item for the relevant delivery item or sales order item, because no preceding billing item exists. If multiple delivery items or sales order items are billed in one final billing document, it can contain items for which there is no provisional billing document; for these items, only single billing items are created. In this way, a final billing document can be a combination of single items and differential item pairs. 

The provisional billing document or differential billing document gives you the option to post revenues as provisions for the time being and not affecting net income. In the final billing document, these provisions are resolved and are posted as revenues to the corresponding profit and loss accounts. To do this, you can make appropriate settings for account determination for each billing type. 

Source: – help.SAP.com 

 

Process steps 

Differential billing can be addressed in two ways. 1) Using Commodity Price Engine and 2) Updating pricing on the Final billing document. 

 

Commodity Price Engine 

The provisional rule in Formula & Pricing (F&A Pricing) supplies a preliminary price. The invoice has the status Provisional, because the final price of the product has not been calculated. On month end the prices from Platts/market data provider are averaged and a new invoice with the final price is created. The system uses the price from the provisional invoice and the final invoice to create a differential invoice. The differential invoice contains the debit or credit amount that was calculated from the difference in price between the previous invoices. 

 

 

Update Final price on the Final Billing document (F2D2) 

Business process, which is not based on Commodity, the option is to update the final price on the order level.

 

Configuration 

Provisional / Difference Billing Type 

Final Billing Type 

Order status shows completed after Final Invoicing 

Provisional Invoice with billing type F2D1on 15-Sep-2021 

Differential Invoice on 8-Oct-21 

Final Invoice with billing type F2D2 on 31-Oct-2021 

After Final Invoice the difference between Provisional Invoice and Final Invoice is Debited or Credited the to Customer and revenue GL. 

Note: 

  • For demonstration purpose we have used Sales Revenue in both provisional and final invoice. However, business requirement can be to post provisional in Non-Revenue GL. This requirement can be achieved with separate condition types in pricing procedure and two different accounting keys. 
  • Please ignore the material used in the demo. 

Disclaimer 

  • Billing category “N” – Provisional or Differential billing document and “O” – Final Billing Document is available up to ECC 6. For S4 HANA versions please reach out to SAP, in current versions of S4 HANA it is not available. Provisional and Final billing is available as part of Commodity Price Engine (CPE). 

 

Conclusion 

With billing category “O’ and “N” in the billing type the provisional billing can be done with differential posting to customer and revenue. On Final billing document final price can be updated and debited / credited to the customer and revenue. Revenue recognition for differential / Provisional billing per IFRS 15 standard can be achieved.