Overview of interim revenue recognition in Project Control (PCS)

Why interim revenue recognition?

When you manufacture products using projects in Project Control (PCS), you often deal with long lead times. During the projects, actual costs are recorded. Revenues and Cost of Goods Sold (COGS) can be determined at the end of the project when the products are finished and delivered. However, international accounting rules, for example, IFRS (International Financial Reporting Standards) require more transparancy in business financials. Public companies must be able to recognize costs and revenues not only at the end of the project but also on different moments during the project.

With revenue recognition in PCS you can determine the interim revenue and interim Costs of Goods Sold (COGS) for an unfinished project, even before shipping any end item.

Terms
  • Revenue
    The gross inflow of economic benefits such as cash, receivables, and other assets during an accounting period. Revenue results from the usual operating activities of an enterprise, for example, sales of goods, sales of services, interest, royalties and dividends.
  • Actual costs
    The real costs of production, hours accounting, purchase, service, sales, finance, warehousing and/or a PCS project.
  • Cost of Goods Sold (COGS)
    An accounting classification to determine the amount of direct materials, direct labor, and allocated overhead associated with the products sold during a given period of time.
  • Work-in-Process (WIP)
    The value of actual costs and results, subtracted with the COGS posted on the project. The WIP value is used for financial reporting on the balance sheet. When a project is closed, the WIP is cleared.
Percentage of completion

If you want to know the interim COGS and interim revenues at a specific moment, you must first determine which percentage of the work on the project is completed. You can use three methods to calculate the percentage of completion (POC):

  • Cost to date
    The actual costs spent until a specific date divided by the estimated total costs at completion. For example, the total estimated costs of the project are $1980,-. The actual costs until the moment that you want to recognize revenue are $200,-. The POC is 200/1980 = 10,1%.
  • Hours progress
    The actual hours spent until a specific date divided by the estimated total hours at completion. For example, the total estimated hours of the project are 500. The actual hours until the moment that you want to recognize revenue are 100. The POC is 100/500 = 20%.
  • Manually entered
    A percentage that expresses an estimate of the completed work. For example, you estimate that on a specific moment, 25% of the work on your project is finished.
To calculate interim revenue and COGS

To calculate the interim revenue on a specific moment, the following calculation is carried out:

[...]

To calculate the interim COGS on a specific moment, the following calculation is carried out:

[...]

Procedure for interim revenue recognition

The details are described in Procedure for Interim Revenue Recognition in Project Control

Related topics