Phased revenue recognition, as outlined described in IFRS 15, applies primarily to is mainly used for long-term contracts, such as those undertaken by construction companies in construction where a project like building a villa over spans 12 months. This method approach involves recognizing revenue and costs based on the progression of the contract, according to the contract’s progress rather than solely just when invoices are issued. The standard allows Although partial revenue recognition can be recognized as a contract asset, but this it can't be recorded as receivables until all contractual obligations are metfulfilled. Only then after this can an invoice be issued and recognized.
Phased revenue recognition isn't restricted to construction companies; it also applies This method is not limited to construction firms but also to service companies with long-term contracts. Rather than Instead of recognizing revenue and costs solely only at the time of invoicing, recognition revenue can be recognized based on the progress of the contract, such as through reflecting various stages of completion.
To set up phased revenue recognition, you need to:
- Go to Administration > General Settings > enable Phased Revenue Recognition.
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For default GL accounts, use Work-in-Progress and Contract Assets accounts
Additionally, if the contract involves a foreign currency, you can choose to use the exchange rate defined on the first revenue recognition date to account for exchange rate fluctuations.
If enabled, the exchange rate set on the date of the first revenue recognition will apply to all subsequent phased revenue recognition documents, with gains or losses calculated only when the invoice is issued.
If disabled, gain/loss calculations will occur during month-end closing using the exchange rates applicable on each document's date.
- To create and use Work type items with associated costs, enable Use Work Type Items in Sales Documents on the Administration > Settings > Sales form. Work-type items can be used in documents such as Quotations, Customer Orders, Adjustments, Credit Notes, Tax Credit Notes, Tax Invoices, and Project Estimates.
- To associate costs with specific cost objects, enable Advanced Product Costing on the Administration > Settings > Production form and choose which objects can be used as cost objects: Customer Order, Project, Project Task, or Item.
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Two approaches can be used depending on the accounting policy, business needs, and contract terms.
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To create a Phased Revenue Recognition document, go to Project Costing> Phased Revenue Recognition.
Create a new document, and fill in the required tabs as explained.
On the Main tab, you can enter general information such as the customer, contract, project, and other relevant data. Key fields include:
- Company: Select the customer for whom the document is created.
- Contract: Automatically populated with the default contract for the selected company.
- Project: Linked to a project if Project Costing is enabled.
- Customer Order: Linked automatically if associated with a customer order.
- Entity: Select the legal entity if multi-company accounting is used.
The Revenue and Costs tab helps list and manage items for which revenue is recognized, focusing on two main areas:
Services Pane: This section lists works and services for the contract, including item properties like quantity, price, and discounts. You can manage manual and automatic discounts, apply VAT, and track recognized revenue and costs.
- Key fields: Item, Quantity, Price, Discount, Current-Phase Revenue.
- The fill button helps populate the Work Costs table.
Work Costs Pane: Displays costs associated with the listed services, allowing tracking of costs in phases.
- Subtabs: WIP shows current costs and Costs Recognized for Previous Phases shows costs recognized in prior phases.
- Key fields: Cost Object, Cost Element, GL Accounts, Amount (Cur.).
You can add items, apply discounts, calculate VAT, and specify project-related details. The pane helps match revenue to the incurred costs for the current phase of the project.
The Pick Work Costs dialog box in the Phased Revenue Recognition process allows you to manually select costs associated with a work item for recognition.
Structure of the Dialog Box:
Work in Progress (Upper Pane):
- Displays all costs related to the selected work item.
- Costs are filtered by Cost Object, Department, or specific search criteria.
- You can refresh the list to reflect changes made by other users.
Selected Work in Progress (Lower Pane):
- Displays the costs you have selected from the Work in Progress list.
- You can use Up and Down buttons to reorder the selected costs.
The Additional Information tab in the Phased Revenue Recognition (create) form allows you to add supplementary details for the revenue recognition document. There are no mandatory fields, but you can specify the following:
- Department: Identify the department responsible for the work related to the customer contract.
- Responsible: Select the employee accountable for the revenue recognition at this specific stage.
Exchange Rate Options:
- Use Exchange Rates Defined on the First Recognition Date: If selected, the exchange rates from the first Phased Revenue Recognition document for the contract will be used for subsequent entries, even if the document date differs.
- If not selected: The exchange rate on the document date will be applied.
Note: The option regarding exchange rates is controlled within the customer contract, not directly in this form.
Finally, issue a final invoice once all contract phases are complete to claim the total revenue recognized throughout the contract's duration.
Phased revenue recognition allows revenue to be recognized at different stages of a project, based on accounting policies and contract terms. The two main approaches are:
- Percentage-of-Completion: Revenue is recognized gradually as work progresses, often based on costs incurred or work completed.
- Milestone-Based: Revenue is recognized when specific milestones or deliverables are met.
Both approaches allow for periodic reviews of recognized revenue, such as quarterly, to track progress and profit/loss. The choice of approach depends on business needs and contract terms.
For ongoing projects, enter beginning balances for work-in-progress and contract assets. Track assets—track costs with appropriate documents and reports. When recognizing revenue for a completed phase, use Phased Revenue Recognition documents to account for costs and revenues.Finally, issue a final invoice once all contract phases are complete to claim the total revenue recognized throughout the contract's duration.