Phased revenue recognition, as outlined in IFRS 15, applies primarily to long-term contracts, such as those undertaken by construction companies building a villa over 12 months. This method involves recognizing revenue and costs based on the progression of the contract, rather than solely when invoices are issued.
Phased revenue recognition is not limited to construction companies; it is also applicable to service companies with long-term service contracts. Instead of recognizing revenue and costs only at the point of invoicing, recognition can occur according to the progress of the contract, such as through stage completions.
To set up phased revenue recognition, you need to:
- Navigate to General Settings and enable Phased Revenue Recognition.
- Access the specific contract and go to the Terms tab to activate Phased Revenue Recognition
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.