Phased revenue recognition, as described in IFRS 15, is mainly used for long-term contracts, such as those in construction where a project like building a villa spans 12 months. This approach involves recognizing revenue and costs according to the contract’s progress rather than just when invoices are issued. Although partial revenue can be recognized as a contract asset, it can't be recorded as receivables until all contractual obligations are fulfilled. Only after this can an invoice be issued and recognized.

This method is not limited to construction firms but also to service companies with long-term contracts. Instead of recognizing revenue and costs only at the time of invoicing, revenue can be recognized based on the progress of the contract, reflecting various stages of completion.

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 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.

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 is a critical component for managing revenue recognition. This tab allows us to handle both the revenue and the associated costs for the work items in a phased manner. The tab consists of two main panes: Services and Work Costs.

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: 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:

1. Percentage-of-Completion: Revenue is recognized gradually as work progresses, often based on costs incurred or work completed.
2. 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.