Phased revenue recognition, as outlined in IFRS 15, applies primarily to long-term contracts, such as those undertaken by construction companies like 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. The standard allows partial revenue recognition as a contract asset, but this can't be recorded as receivables until all obligations are met. Only then can an invoice be issued and recognized.
Phased revenue recognition is not limited to construction companies but also applies 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:
- Go to Administration > General Settings > enable Phased Revenue Recognition.
- Access the specific contract > Terms tab > 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.
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.
Finally, issue a final invoice once all contract phases are complete to claim the total revenue recognized throughout the contract's duration.