Phased revenue recognition, as outlined in IFRS 15, applies is primarily applied to long-term contracts, such as those undertaken by construction companies construction projects that extend over an extended period, like building a villa over 12 months. This method involves recognizing Under this approach, revenue and costs are recognized progressively based on the progression of the contract, rather than solely when invoices are issued.Phased revenue recognition is not limited contract’s completion stage rather than solely upon invoicing. While partial revenue can be recorded as a contract asset, it cannot be classified as receivables until all contractual obligations are met. Only then can an invoice be issued and recognized.
This method is not exclusive to construction companies; it is also applicable applies to service companies providers with long-term service contracts. Instead of recognizing revenue and costs only at the point of upon invoicing, recognition can occur according to the progress of the contract, such as through stage completionsthis approach allows revenue to be recorded in alignment with the contract's progress, capturing different phases of completion.
To set up phased revenue recognition, you need to:
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- Go to Administration > General Settings
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- > Enable Phased Revenue Recognition.
- Access the specific contract
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- > Terms tab
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- > activate Phased Revenue Recognition
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.
Two approaches can be used depending on the accounting policy, business needs, and contract terms.
Revenue can be recognized at various stages, such as quarterly, allowing for periodic reviews of amounts and profit and loss.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.
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:
The Revenue and Costs tab allows users to list and manage items for revenue recognition in phased contracts. It includes two panes:
- Services Pane: Lists work and service items for revenue recognition. Users can specify item details, quantities, discounts, and recognition percentages.
- Work Costs Pane: Displays associated costs for listed services, with options to view costs from previous recognition phases.
This tab helps track recognized revenue and costs based on contract progress, ensuring accurate financial reporting.
The Services Pane allows adding and managing Work/Service items with details like quantity, price, discounts, VAT, and optional characteristics. Additionally, some more fields need to be filled i.e.
Already Recognized: The Already Recognized Quantity and Already Recognized Revenue columns show the revenue and costs recognized in previous phases. You can access more details in the Costs Recognized for Previous Phases tab if necessary.
Revenue Recognition Percent/ Current-Phase %: Specifies the percentage of total revenue to be recognized in the current phase.
Cost Details: The Total Cost and Already Recognized Costs columns show the costs associated with the work, including previous recognitions.
The Pick Work Costs dialog box in the Phased Revenue Recognition process allows you to select costs associated with a work item for recognition manually.
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 costs with appropriate documents and reports. When recognizing revenue for a completed phase, use Phased Revenue Recognition documents to account for costs and revenues.
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