Deferred Revenue Or Revenue Recognition

Summary

The International Financial Reporting Standards (IFRS) has Standard 15 that basically says that revenue can only be recognized when the recipient of the  service/goods can take control of the delivered services/goods. See the description of IFRS Standard 15 .

  • The Acumatica deferred revenue application has the following features:

    • When a deposit is made for a project that has not been started yet, this deposit is not booked as revenue but as a liability aka deferred revenue

    • When work starts on the project, and maybe 25% is completed, 25% of that deposit is booked as recognized revenue

    • This application automatically recognizes that revenue. Powerful revenue recognition templates can be set up at the line item level.

  • Video (30 mins, May 2017).

Revenue Recognition under a Fixed Quote Project

A company has contracted a fixed quote project called "Video Project" project with its customer USA Bartender.

The project fixed quote is $10,000 and consists of the following:

  • Task 1

    • Budget

      • Labor: 100 hours at $40/hour is $4000

      • Parts: computer for $1250

  • Task 2

    • Budget: $4750

Contract specified that a 50% deposit ($5000) needs to be made upfront.

IFRS Standard 15 requires that the 50% deposit can not be recognized till 50% of the work is completed (??).

Acumatica implementation:

  • $5000 deposit is collected but booked to a liability account "Billing in excess of cost" as a debit.

  • When James Doe starts working on the project, and enters his time of 20 hours, 20 hours are billed for $800. AR account is debited and Sales revenue is credited.

  • 20 hours is 20% of 100 hours. Therefore 20% of $10,000 = $2000 is allocated as recognized revenue.

  • However James Doe salary is only $30/hr which results in $600.

  • Increase of budget hours:

  • The estimate of hours is increased to 120 hours

    • 20 hours of 120 hours is 15%

    • New budget is $10000 plus $800 = $10,800

    • 50% of $10,800 is $5400. $400 additional deposit needed but not recognized as revenue.

    • 15% of $10800 is recognized as revenue.

    • I need to get more details...

Revenue Recognition under a Time and Materials Project

The video (30 mins, April, 2020) will explain the set up of allocation rules to recognize revenue when earned.