Phased revenue recognition, as described outlined in IFRS 15, is mainly used for primarily applied to long-term contracts, such as those in construction where a project construction projects that extend over an extended period, like building a villa spans over 12 months. This Under this approach involves recognizing , revenue and costs according to are recognized progressively based on the contract’s progress completion stage rather than just when invoices are issued. Although solely upon invoicing. While partial revenue can be recognized recorded as a contract asset, it can't cannot be recorded classified as receivables until all contractual obligations are fulfilledmet. Only after this then can an invoice be issued and recognized.
This method is not limited exclusive to construction firms but companies; it also applies to service companies providers with long-term contracts. Instead of recognizing revenue and costs only at the time of upon invoicing, this approach allows revenue can be recognized based on the progress of the contract, reflecting various stages to be recorded in alignment with the contract's progress, capturing different phases of completion.
To set up phased revenue recognition, you need to:
- Go to Administration > General Settings > enable Enable Phased Revenue Recognition.
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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.
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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 allows users to list and manage items for which revenue is recognized, focusing on two main areasrevenue recognition in phased contracts. It includes two panes:
- Services Pane:
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- Key fields: Item, Quantity, Price, Discount, Current-Phase Revenue.
- The fill button helps populate the Work Costs table.
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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.).
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- 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 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.
manually.
Finally, issue a final invoice once all contract phases are complete to claim the total revenue recognized throughout the contract's duration.
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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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