powerobjects: Revenue Recognition: Fixed Price Long-term Projects
Revenue is one of the most important variables that both investors and executives consider when assessing the performance and prospects of a company. It is also one of the main components used in determining taxable income and a company’s tax liability. A company’s revenue is important to many parties. But how does a company arrive at the revenue figures reported on its financial statements? Which method of accounting was employed? Could a different accounting method produce a different result? Are there rules that govern the recognition and reporting of revenue? These are legitimate questions raised by company executives, investors and tax authorities.
U.S. Companies are required to abide to US GAAP (Generally Accepted Accounting Principles) which dictate that revenue is recognized when earned and realized. This means when an arm’s length transaction is completed, such as goods delivered or services rendered, the transaction is completed within an accounting cycle and revenue is recognized and reported in the same cycle. No accounting challenges here. But are all transactions completed within one accounting cycle or within the same year? Unfortunately, no.
Long-term projects are projects that extend beyond a year or cover multiple accounting cycles. A construction project that will take three years to complete is an example of a long-term project. These projects need special attention as they pose some accounting challenges, most of which stem from the timing and recognition of revenue. It gets even more challenging when dealing with fixed price long-term projects.
In response to a cry for help from the accounting community, FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) launched a joint project in May 2014 aimed at developing a common set of rules for revenue recognition in long-term projects, the result of which was IFRS 15 (International Financial Reporting Standard).
IFRS 15 is the new FASB and IASB joint standard on revenue recognition that took effect in January of 2018. All public companies are expected to adopt IFRS 15. For many companies, this will not only require a change in accounting method but also a change in key business processes. The questions many companies ask are: How ready are we for this change? How long will it take to implement? How can it be done with minimal interruption to our business? Do we have the resources?
Why Dynamics 365 for Finance and Operations?
The good news is there is help! Microsoft Dynamics 365 for Finance and Operations provides a solution to this problem. It is very user friendly, customizable, cost effective, and can be deployed quickly with the help of skilled consultants. Dynamics 365 for Finance and Operations is a cloud-based SaaS Service with functionalities capable of handling simple to complex projects across all major industry verticals.
Project Management and Accounting in Dynamics 365 for Finance and Operations can help in planning, execution, and recording of these long-term projects. It helps companies better manage projects, be efficient in accounting for these projects, and comply to IFRS 15. We will show you how below!
(Fig 1 – Project Management and Accounting page)
(Fig 2 – Project Management and Accounting Workspace)
The Completed Project Method defers revenue recognition to the end of the project. The set up requires the user to first create a project in the system. Each project is assigned a unique project ID and a contract ID. The contract ID identifies an external customer who is paying for the project. All costs incurred during the project are capitalized and accumulated in a WIP (Work in Progress) balance sheet account. On completion of the project, the WIP account is credited and a corresponding debit entry is made to a project expense account, an income statement account. Project revenue account is credited for the amount of revenue earned from the project. These postings are automated by use of a Ledger Posting also known as a Posting Profile.
Dynamics 365 > Project Management and Accounting > All Projects > New Project
(Fig 3 – Project Setup Form)
The various ledger accounts are defined in the posting profile. Users can define multiple accounts within a ledger posting profile. The posting profile is assigned to a project group. A project must belong to a project group.
Users can collect granular data about a project and produce project specific financial statements and reports.
Dynamics 365 > Project Management and Accounting > Setup >Posting > Ledger Posting
(Fig 4 – Ledger Posting Form)
Dynamics 365 for Finance and Operations provides a solution to project accounting and revenue recognition which is:
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Happy Dynamic 365’ing!
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