Revenue Recognition Accounting Policy
SAP derives revenue from the sale or license of software products and of support, subscription, consulting, development, training, and other services. The vast majority of SAP's software arrangements include support services, and many also include professional services and other elements.
Software and software-related service revenue, as shown in SAP's Consolidated Income Statements, is the sum of software revenue, support revenue, and revenue from subscriptions, cloud subscriptions and support, and other software-related services. Professional services and other service revenue as shown in SAP's Consolidated Income Statements is the sum of consulting revenue and other service revenue. Other service revenue as shown in SAP's Consolidated Income Statements mainly consists of revenue from training services, messaging services, and SAP marketing events.
If, for any of product or service offerings, SAP determines at the outset of an arrangement that the amount of revenue cannot be measured reliably, SAP concludes that the inflow of economic benefits associated with the transaction is not probable, and SAP defers revenue until the arrangement fee becomes due and payable by the customer. If, at the outset of an arrangement, SAP determines that collectability is not probable, SAP concludes that the inflow of economic benefits associated with the transaction is not probable, and SAP defers revenue recognition until the earlier of when collectability becomes probable or payment is received. If collectability becomes unlikely before all revenue from an arrangement is recognized, SAP recognizes revenue only to the extent of the fees that are successfully collected unless collectability becomes reasonably assured again. If a customer is specifically identified as a bad debtor, SAP stops recognizing revenue except to the extent of the fees that have already been collected.
SAP accounts for out-of-pocket expenses invoiced by SAP and reimbursed by customers as support, consulting, or training revenue, depending on the nature of the service for which the out-of-pocket expenses were incurred.
Software revenue represents fees earned from the sale or license of software to customers. Revenue from the sale of perpetual licenses of SAP's standard products is recognized in line with the requirements for selling goods stated in IAS 18 (Revenue) when evidence of an arrangement exists, delivery has occurred, the risks and rewards of ownership have been transferred to the customer, the amount of revenue and associated costs can be measured reliably, and collection of the related receivable is reasonably assured. The sale is recognized net of returns and allowances, trade discounts, and volume rebates. SAP usually sells or licenses software on a perpetual basis.
Occasionally, SAP licenses software for a specified time. Revenue from short-term time-based licenses, which usually include support services during the license period, is recognized ratably over the license term. Revenue from multi-year time-based licenses that include support services, whether separately priced or not, is recognized ratably over the license term unless a substantive support service renewal rate exists; if this is the case, the amount allocated to the delivered software is recognized as software revenue based on the residual method once the basic criteria described above have been met. In general, SAP's software license agreements do not include acceptance-testing provisions. If an arrangement allows for customer acceptance-testing of the software, SAP defers revenue until the earlier of customer acceptance or when the acceptance right lapses. SAP usually recognizes revenue from software arrangements involving resellers on evidence of sell-through by the reseller to the end-customer, because the inflow of the economic benefits associated with the arrangements to SAP is not probable before sell-through has occurred.
Sometimes SAP enters into customer-specific software development agreements. SAP recognizes software revenue in connection with these arrangements using the percentage-of-completion method based on contract costs incurred to date as a percentage of total estimated contract costs required to complete the development work. If SAP does not have a sufficient basis to reasonably measure the progress of completion or to estimate the total contract revenue and costs, revenue is recognized only to the extent of the contract costs incurred for which SAP believes recoverability to be probable. When it becomes probable that total contract costs exceed total contract revenue in an arrangement, the expected losses are recognized immediately as an expense based on the costs attributable to the contract.
Support revenue represents fees earned from providing customers with unspecified future software updates, upgrades, and enhancements, and technical product support. SAP recognizes support revenue for most of services ratably over the term of the support arrangement. SAP does not separately sell technical product support or unspecified software upgrades, updates, and enhancements. Accordingly, SAP does not distinguish within software and software-related service revenue or within cost of software and software-related services the amounts attributable to technical support services and unspecified software upgrades, updates, and enhancements.
Subscription and other software-related service revenue represents fees earned from subscription and software rental arrangements, cloud subscriptions and support, and other software-related services. Subscription contracts combine software and support service elements, as under these contracts the customer is provided with current software products, rights to receive unspecified future software products, and rights to support services during the subscription term. Customers pay a periodic fee for a defined subscription term, and SAP recognizes such fees ratably over the term of the arrangement beginning with the delivery of the first product.
Software rental contracts also combine software and support service elements. Under such contracts the customer is provided with current software products and support, but not with the right to receive unspecified future software products. Customers pay a periodic fee over the rental term and SAP recognizes fees from software rental contracts ratably over the term of the arrangement.
Revenue from cloud subscriptions relates to software hosting arrangements that provide the customer with the right to use certain software functionality, but do not include the right to terminate the hosting contract and take possession of the software without significant penalty. Cloud subscription revenue as well as revenue from support services provided for SAP's cloud offerings is generally recognized ratably over the term of the arrangement.
Other software-related service revenue mainly results from software-related revenue-sharing agreements with other software vendors.
SAP recognizes consulting and other service revenue when the services are performed. Consulting revenue primarily results from implementation contracts to install and configure SAP's software products. Usually, SAP's consulting contracts do not involve significant production, modification, or customization of software and are recognized using the percentage-of-completion method of accounting as outlined above.
Other service revenue consists of fees from training services, cancelable hosting contracts, application management services (AMS), messaging services, revenue from SAP marketing events, and referral fees.
Training services provide educational services to customers and partners regarding the use of SAP's software products. SAP recognizes training revenue when the services are rendered. Cancelable hosting contracts allow the customer to terminate a software hosting arrangement at any time and to take possession of the hosted software without significant penalty. In these contracts revenue is allocated to the hosting element and to the software element. The hosting revenue is recognized ratably over the agreed hosting period. SAP's AMS contracts provide post-implementation application support, optimization, and improvements to a customer's IT solution. SAP recognizes revenue from AMS services when the services are rendered. Messaging revenue mainly represents fees earned from transmitting electronic text messages from one mobile phone provider to another. SAP recognizes revenue from message services based upon the number of messages successfully processed and delivered. Revenue from fixed-price messaging arrangements is recognized ratably over the contractual term of the arrangement. Revenue from marketing events hosted by SAP, for which SAP sells tickets to its customers, is recognized after the marketing event takes place. Fees from referral services are commissions from partners to which SAP has referred customers.
The vast majority of SAP's software arrangements form multiple-element arrangements, as they include support services, and many also include professional services and other elements. As authorized by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8), SAP follows the guidance provided by FASB ASC Subtopic 985-605, Software Revenue Recognition, as amended, in order to determine the recognizable amount of license revenue in multiple-element arrangements. Revenue from multiple-element arrangements is recognized using the residual method of revenue recognition when company-specific objective evidence of fair value exists for all of the undelivered elements (for example, support services, consulting services, or other services) in the arrangement, but does not exist for one or more delivered elements (generally software). SAP determines the fair value of and allocate revenue to each undelivered element based on its company-specific objective evidence of fair value, which is the price charged when that element is sold separately or, for elements not yet sold separately, the price established by management if it is probable that the price will not change before the element is sold separately. SAP allocates revenue to undelivered support services based on the rates charged to renew the support services annually after an initial period. Such renewal rates generally represent a fixed percentage of the discounted software license fee charged to the customer. The vast majority of SAP's customers renew their annual support service contracts at these rates. SAP allocates revenue to future incremental discounts whenever customers are granted the right to license additional software at a higher discount than the one given within the initial software license arrangement, or to purchase or renew support or services at rates below company-specific objective evidence of fair value of the service.
SAP defers revenue for all undelivered elements and recognize the residual amount of the arrangement fee attributable to the delivered elements, if any, when the revenue recognition criteria described above have been met and company-specific objective evidence of fair value for the undelivered elements exists.
Combining or segmenting multiple-element arrangements consisting of software and consulting or other professional services depends on:
- Whether the arrangement involves significant production, modification, or customization of the software, and
- Whether the services are not available from third-party vendors and are therefore deemed essential to the software.
If neither of the above is the case, revenue for the software element and the other element is recognized separately. In contrast, if one or both of the above is the case, the elements of the arrangement are combined and accounted for as a single unit of accounting, and the entire arrangement fee is recognized using the percentage-of-completion method as outlined above. If the arrangement includes multiple elements, SAP excludes those elements from contract accounting that meet the criteria for separate recognition (for example support services or training), provided that the elements have stand-alone value.
SAP's contributions to resellers that allow resellers to execute qualified and approved marketing activities are recognized as an offset to revenue, unless SAP obtains a separate identifiable benefit for the contribution, and the fair value of the benefit is reasonably estimable.
Source: SAP AG, Annual Report
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