For a long-term contract or project, the entity cannot recognize the revenue until all contract obligations are completed. This results in incorrect reflection of the entity's performance in financial reports.
IFRS 15 standard establishes some new rules for reporting and measuring the revenue incurred over time with the progress of long-term contract completing.
According to IFRS 15, when an entity has partially completed or completed only some of obligations, it can recognize some revenue as contract asset; however, it still cannot recognize this partial revenue as receivables. Only once all obligations are satisfied, the entity can issue an Invoice and recognize the contract assets and remaining revenue as receivables.
FirstBit provides the functionality of phased revenue recognition that allows each entity to recognize revenue in process of obligation completing and costs accumulated up to specific dates.
Configuration options
To be able to follow the rules of IFRS15, select the Enable the Phased Revenue Recognition Functionality option on the Administration > Settings > General Settings form. This functionality makes the Phased Revenue Recognition and WIP Costs Adjustments documents available for using.
Note. The Phased Revenue Recognition document is intended for recording costs of the items of only Work, Service, and Labor types.
To be able to create and use items of Work type which can have associated costs, select the Use Work Type Items in Sales Documents on the Administration > Settings > Sales form. The items of Work type can be used in the following documents: Quotation, Customer Order, Customer Order Adjustment, Credit Note, Tax Credit Note, Tax Invoice, and Project Estimates.
To be able to link costs to specific cost objects, select the Advanced Product Costing option on the Administration > Settings > Production form and select what objects can be used as cost objects: Customer Order, Project, Project Task, or Item.
Personal settings
If you often work with documents related to phased revenue recognition, you can specify the default positions of Projects, Project Tasks, and Customer Orders in Phased Revenue Recognition documents. For this, open the Quick menu > Personal Settings. At the bottom of the form, click Advanced Settings and open the Document Attribute Positions tab. Then, you can select whether you need Project as a field on the Main tab of the documents or as a column on the Items tab. The similar choice you can make for Project Tasks and Customer Orders. For particular documents, you can change these settings by using the Settings button on the document form toolbar.
Also, you can choose where (in heading or in document lines) you need to place a reference to Customer Order, Project, or Project Task in Phased Revenue Recognition documents.
Default GL accounts
For the functionality of phased revenue recognition, you can use the following default GL accounts on the chart of accounts (COA):
- Work-in-Progress GL account with Item, Project, and Customer Order as dimensions
- Contract Assets GL account in the Current Assets section
You can use the default accounts or add other accounts to the corresponding sections.
Registering contract obligations
When registering a new contract for a customer company intended for a long-term сooperation, specify that the Phased Revenue Recognition functionality will be used for this contract by selecting the Use Phased Revenue Recognition option on the Terms tab of the Company Contract (create) form.
The obligations for a such long-term contract can be registered by creating a Customer Order or a Project with Project Estimates. To designate the stages of the project or contract obligations completing, you can create items of Work type.
If multiple currencies involved, consider selecting the Use Exchange Rates on the First Revenue Recognition option. In case this option is selected, the exchange rate used when the first document of revenue recognition was created will be used for all later documents. If the option is not selected, the exchange rate in effect on the day of month-end closing will be used for all documents posted in this month.
Entering the beginning balances
If you are switching to this ERP software in the middle of your long-term projects or cooperation with customers, you may need to enter the beginning balances of work-in-progress costs and expenses incurred in process of project fulfillment and beginning balances of contract assets, that is, already recognized revenues.
You can specify the beginning balances for such contracts by creating the Accounting > See also > Opening Balances Entering documents with the Contract Assets and Work in Progress transaction types. For details, refer to Creating an Opening Balances Entering Document. The Contract Assets tab and Creating an Opening Balances Entering Document. The Work in Progress tab.
Tracing the work-in-progress costs
For registering the related purchases, you can use Invoices Received with specified Entity, Warehouse, Company, Contract. You can record the purchased services directly to a Work-in-Progress GL account.
However, the purchased materials and inventory items should be recorded to an intended warehouse, and then you will need to use Inventory Transfers to assign the materials to the department that executes the project or customer order and record them to a Work-in-Progress GL account with the corresponding Cost Object.
Also, for tracing related costs, you can use the following documents: Debit Notes, Inventory Receipts, Other Expenses, bank documents with Other transaction type, and Employee Expense Reports. You will need to replace the default account with the Work-in-Progress account and specify the cost object.
You can view the current costs of works in progress using the following report: Work in Progress Balances, Statement of Work in Progress.
To allocate costs with no Cost Object specified, at the month end you can use the WIP Allocations by Cost Object documents.
Tracing labor costs
You can record the labor costs accrued for the employees involved in work for contract or project (project tasks) to WIP GL account by using the following documents: Payroll, Sick Leave, Vacation, End-Of-Service Benefit Calculation, Calculation of Accumulated Vacation Pay.
For this, when creating a document, you need to replace the default expense account with the Work in Progress account. If particular employee worked only for a specific Cost object, you can specify this cost object in any payroll-related document.
If the employee worked for multiple contracts and projects, then you can skip specifying the cost object.
Once payroll is calculated, you can allocate the labor costs not associated with any particular cost object to multiple cost objects by using the WIP Allocations by Cost Object document with the Allocation of Labor Costs transaction type. For details, refer to WIP Allocations by Cost Object (Allocation of Labor Costs).
Allocating depreciation costs
Fixed assets are used for works on contracts. If a new fixed asset will be used only for such works, then you can select the WIP account as the default depreciation expense account in the Fixed Asset Entry document.
If the fixed asset will be used for such works or projects only in specific periods, you can replace the default depreciation expense account with the WIP GL account in the Fixed Asset Depreciation document manually for such specific periods. Also, you can specify a project and task or cost object for which this fixed asset is used.
The WIP Allocations by Cost Object documents with the Allocation of Fixed Asset Depreciation Costs transaction type are used for allocating the depreciation costs calculated at the month end and posted to the WIP GL accounts with no cost object specified.
For allocating the depreciation costs, you can select the source document, Depreciation, and set the criteria for source of costs: specific departments, non-current asset classes, and particular fixed assets. On the Allocation Base tab, you can set the allocation coefficients for Cost Objects involved. Then on the Allocation tab, you can review the depreciation costs distributed between Cost Objects.
Recognizing revenues and costs for a particular phase
When a specific phase of contract or project is completed, that is some works are completed or certain contract obligations are fulfilled as it is acknowledged by the customer, then the entity can recognize the revenue from this completed phase according to core principle of IFRS 15. The costs associated with this phase are also can be recognized. For this, you can create a Phased Revenue Recognition document manually or you can generate it based either on Customer Order or Project Estimates.
Using a Phased Revenue Recognition document, you can list the Services and Works that were completed at this phase. The list of costs related to completed Works is populated automatically based on the specific Cost Objects. You can manually edit the list of costs or add costs if needed. The revenue will be recognized according to the prices and quantities of the services and works that were completed. For details, refer to Phased Revenue Recognitions.
Note. Allocation of WIP costs including all the related labor costs and depreciation costs to costs objects should be performed before you create a Phased Revenue Recognition document.
On posting the document, the listed costs are moved from the WIP GL account to the account of Costs of Completed Works; the corresponding percent of planned revenue is recorded to the Contract Assets GL account while the remaining planned revenue remains recorded to the Contract Obligations account.
For each subsequent phase except for the final phase, you can create a new Phased Revenue Recognition document.
If needed, you can review information on the related costs by running the following reports in the Accounting module:
- Work in Progress Balances
- Statement of Work in Progress
- Costs of Completed Works
- Costs of Completed Works by Project
For details, refer to Accounting: Reports.
Issuing a final Invoice
When all phases are completed and all obligations are satisfied, you can issue an Invoice that would request payment for all the works within the contract or related to the project. In this invoice you can list the Works and Services involved in the last phase of contract completion and the associated costs. Also, you can include all the Phased Revenue Recognition documents related to the contract or project with all the details. The invoice will include the applicable VAT amounts.
On posting the Invoice, the total of revenues recognized at each phase of the contract completion will be recognized as the receivable amount.