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 isn't restricted to construction companies; it also applies to service companies with long-term contracts. Rather than recognizing revenue and costs solely at the time of invoicing, recognition can be based on the progress of the contract, such as through 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 choose to 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.
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.