Recognizing Project Costs and Revenues

This process is used to prepare monthly, quarterly, or annual financial statements for a project, with reference to the anticipated results.

After using this process the project costs and revenues are handled in these ways:

Ongoing activities are activated.
Costs and revenues are recognized in the statement of income.
Expense and revenue reservations are recorded.

Project recognition

In almost all projects there is a significant difference in time when expenditures and income are recorded against the statement of income. Recognition is the method to eliminate the false effects this may have to the statement of income during projects. Based on the project forecast figures, the ratio between forecast final cost and forecast final revenues can be kept during projects using different methods. Also, the calculation base can be controlled using the different methods.

To recognize project costs and revenues, a recognition method must be specified on the reporting level in the project. Different methods can be processed in parallel during recognition. However, only one method is valid per project and reporting level.

Depending on the recognition method chosen on the reporting level, and recognition type triggered, the amounts are calculated differently. One of the methods is based on the forecast of revenues and costs. Another method is based on the actual cost. The method decides what amounts are calculated, and how. The recognition works with six different recognition types for amounts and each method calculates these amounts differently. For example, not all amounts are calculated for every method. The table in this document with the formula shows how the amounts are calculated per method and type.

To recognize project costs and revenues, a recognition method must be specified on the reporting level in the project on 'Project. Open' (POS100/G). Different methods can be processed in parallel during recognition. However, only one method is valid per project and reporting level. This means that you can have several different recognition methods in a project, one per reporting level. Each recognition method could in turn trigger many recognition types.

Recognition proposals include six different amounts, so called recognition types, for which the recognition method selected regulates how and if they are calculated. These are the amounts:

Activated work in progress - costs
Activated work in progress - revenues
Recognition - costs
Recognition - revenues
Actual cost reservation
Actual revenue reservation

The project recognition function works with the outcome values in the general ledger through 'Voucher. Display' (GLS200), the values in the budget/forecast through 'Project Forecast. Open' (POS120) and the project structure in 'Project. Open' (POS100). The recognition is done according to the project management settings in 'Settings – Project Management' (CRS590) and settings on the actual projects.

In M3 BE, a recognition proposal is created in 'Project Recognition. Open' (POS470) for all projects that exist in the division for the selected period. Transactions are aggregated and amounts are calculated differently depending on the recognition methods and recognition types.

When creating the proposal in (POS470), the actuals from the general ledger in (GLS200) and the forecasted amounts in (POS120) are used. The result can be viewed per division in 'Recognition. Open Lines' (POS471) and per project in 'Project Recognition. Open Lines' (POS472). (POS471) is an accumulation per recognition method and recognition type of all project records in (POS472). (POS472) is an accumulation of all records per project, reporting level and recognition method and type. Depending on the setting of the 'Recognition level' parameter in (CRS590), either the values from (POS471) or (POS472) are transferred to the general ledger as recognized revenues and costs.

Before you start

The process can be started when the following prerequisites are met:

The project status is between 10 and 80.
The recognition method is set for the project on its reporting level. The project can have different recognition methods at the same time, though these must each be for different reporting levels.
A voucher number series is specified in 'FAM Function. Open' (CRS405). The FAM function for project recognition is PO30.
The recognition methods used are defined in 'Settings – Recognition' (POS820). The calculated amount can be rounded according to the rounding rule defined by recognition method. The recognition method is connected to project template or project.
Accounts used in project recognition are defined in 'Recognition Account. Open' (POS825). These accounts do not update the financial figures for the project and are used when performing account recoding at final project recognition, which is crediting of balance accounts. The recoding account relations are defined in (POS826).
Project parameters are set by division in 'Settings - Project Management' (CRS590).
- The parameter 'Accounting method' (ACME) indicates whether costs and revenues for ongoing projects are recorded on the balance sheet or the income statement during the project. The accounting method has an impact on how the project recognition works. With this, you set what recognition types are created in the recognition proposal in combination with the recognition method.
- The parameter 'Cr bal account'(CDET) indicates if balance accounts should be credited at final recognition.
- The parameter 'Recognition level' (SELE) decides on what level the recognition proposal is to be transferred to the general ledger. It is either transferred on total level or per project reporting level. If it is transferred on total level it means that the accumulated data per recognition method and type from (POS471) is used. With this approach the transactions in the general ledger consist of aggregated values from several different projects and are therefore not updated with project and element number. If the recognition proposal is transferred per project level, the data from table program (POS472) is used, which is the total per period. This also means that a project and element reporting level is used. The transactions in the general ledger are then updated with project and element number.
Accounting information is specified in 'Accounting Rule. Set' (CRS395). The valid accounting event is PO30 and accounting types are 801-812.
A current forecast for costs and revenues is specified for the project. This forecast is used to calculate the costs and revenues that are recognized. See Project Forecasting.

Follow these steps

Follow these steps to go through the process:

Changing recognition status:
The recognition status indicates whether to recognize costs and revenues. This status is used only with recognition methods 1 and 2. The status must be set to 80 in 'Project. Update Recognition Status' (POS280) to recognize cost and revenues in the project. The status is most often changed in connection with such events as delivery or when the project is finished. The recognition status can be either 20-'Not recognized' or 80-'Recognized'.
The initial recognition status is set on 'Project Template. Open' (POS093/F), using F14='Recognition status'. The status can be different for the various parts of a project. For example, if the project is divided into two stages, the first can have status 20, while the second has 80. Note that recognition status can only be changed for project elements marked for budgeting and on elements at the highest level.
Recognition status 85 is possible to assign. The functionality is equal to 80 but the elements assigned recognition status 85 are possible to select in the project report in 'Project. Print Report' (POS650).

Creating recognition proposal:

The recognition status identifies the progress made with the recognition proposal. Revenues and expenses are recognized for projects each period. When created, the recognition proposal is displayed on the project reporting level, and totaled for each reporting period and recognition method.

Recognition proposals include six different amounts for which the selected recognition method regulates how and if they are calculated. These are the amounts:

Activate work in progress - costs
Activate work in progress - revenues
Recognition - costs
Recognition - revenues
Actual cost reservation
Actual revenue reservation.

This table shows the different methods to calculate the recognized costs and revenues:


Recognition method	Activated WIP - costs	Activated WIP - revenues	Recognized costs (Cr)	Recognized revenues (Rr)	Reservation cost	Reservation revenue
1	Yes/no	Yes/no	Cf* (Rf80/Rf)	Rf80	Cr-Co80	No
2	Yes/no	Yes/no	No	No	No	No
3	Yes/no	Yes/no	Co	Rf*(Cbo/Cf)	No	Rr-Ro
4	Yes/no	Yes/no	Co	Rf*(Cbo/Cf)	No	Rr-Ro
5	Yes/no	Yes/no	Co	Rf*(Cbo/Cf)	No	Rr-Ro
6	Yes/no	Yes/no	Co	Rf*(Cbo/Cf)	No	Rr-Ro
7	Yes/no	Yes/no	Cf*(Ro/Rf)	Ro	Cr-Co	No
8	Yes/no	Yes/no	Cf*(Ro/Rf)	Ro	Cr-Co	No

Explanation of keys:


Key	Description
Cbo	Lowest amount comparing time-distributed forecast and actual total cost.
Cf	Total cost forecast
Cf80	Cost forecast budget level (for project elements with recognition status 80)
Co	Total actual cost
Co80	Actual cost (for project elements with recognition status 80)
Cr	Recognized cost
Qbo	Lowest quantity comparing time-distributed forecast and actual quantity. Note that only budget items with entry option 4 are considered.
Qf	Quantity forecast. Note that only budget items with entry option 4 are considered.
Qo	Quantity outcome, that is, the actual quantity reported in the Time Accounting module. The quantity usually refers to hours.
Rf	Total revenue forecast
Rf80	Revenue forecast budget level (for recognition status 80)
Ro	Total actual revenue
Rr	Recognized revenue.

Recognition methods 7 and 8:

Recognition methods 7 and 8 are the same in all aspects but one: method 8 enables you to distribute the recognition amount between several accounts instead of just one. The accounts to use for method 8 are defined in 'Recognition Account. Open' (POS825) by selecting related option 11= 'Recoding'. This option displays 'Recognition Account. Recode' (POS826), where you define the accounts to use for the distribution.

Accounting events description:

When the project is not closed, so the project status is lower than 80:

Work in progress costs are activated only if costs are recorded against income. Refer to the accounting method defined in (CRS590). The valid accounting event is PO30 and accounting types 801 and 802, for debit and credit, respectively.
Work in progress revenues are activated only if costs are recorded against income. Refer to the accounting method defined in (CRS590). The valid accounting event is PO30 and accounting types 803 and 804, for debit and credit, respectively.
Costs are always recognized against income. The valid accounting event is PO30 and accounting types 805 and 806, for debit and credit, respectively.
Revenues are always recognized against income. The valid accounting event is PO30 and accounting types 807 and 808, for debit and credit, respectively.
Cost reservations are created for recognition methods 1, 7 and 8. The valid accounting event is PO30 and accounting types 809 and 810, for debit and credit, respectively.
Revenue reservations are created for recognition methods 3, 4, 5 and 6. The valid accounting event is PO30 and accounting types 811 and 812, for debit and credit, respectively.

When the project is closed, and is in status 80:

Work in progress costs are not activated.
Work in progress revenues are not activated.
Costs are always recognized if these are recorded on the balance sheet. Refer to the parameters in (CRS590). The valid accounting event is PO30 and accounting types 805 and 806, for debit and credit, respectively.
Revenues are always recognized if these are record on the balance sheet. Refer to the parameters in (CRS590). The valid accounting event is PO30 and accounting types 807 and 808, for debit and credit, respectively.
Cost or revenue reservations are not created.
When costs and revenues are recorded against the balance sheet as defined by the accounting method in (CRS590), these transactions are credited and another account, such as a bank account, is debited. This is performed if the 'Credit balance account' parameter in (CRS590) is set to zero.

If no errors are identified during the creation of recognition proposal, the proposal status is set to 20.

Recognition method 3 requires a locked scheduling version. If there is none, an error code is displayed per project and the proposal is assigned status 19. Transactions cannot be transferred to the general ledger until the error is corrected and the proposal regenerated.

The amounts for recognized costs and recognized revenues in the generated proposal can be rounded off. The rounding rules are defined by recognition method in (POS820).

Adjusting recognition proposal:
These proposals can be adjusted for recognized costs, recognized revenues and reservations. Activated work in progress cannot be changed.
If the recognition level defined in (CRS590) are set for transfer to the general ledger on the project level, the amounts can only be adjusted on the project level. If a transfer is made on the total level, the amounts on both the project level and total level can be adjusted. The adjusted proposal is assigned status 30.
Transferring recognition to general ledger:
These settings must be made for a transfer to the general ledger:
- A voucher number series must be created in 'FAM Function. Open' (CRS405). The FAM function for project cost/revenue recognition is PO30.
- Recognition accounts must be defined in 'Recognition Account. Open' (POS825).
If the project is not closed, all account entries are reversed the first day of the next accounting period. If the project is closed, there is no reversal. When the project costs and revenues are recognized as final, the project status is set to 85-'Final'. Note that projects with costs and revenues not recognized as final cannot be restarted.