One of the strengths of Projector is that all the data that is needed to accurately recognize revenue is managed within one single system, including:
- How much labor has been expended on a project to date (via time cards).
- How much labor is projected going forward to complete the negotiated scope (via booked hours).
Since this data is (or should be) maintained on an ongoing basis through the organization's typical use of Projector, there are no special steps that need to be taken to enable revenue recognition, save for ensuring the data is as up-to-date as possible prior to following the revenue recognition process.
The actual process of managing revenue recognition in Projector includes these steps:
- Determining the percent complete basis – determining the method that will be used to calculate what percent of the engagement is complete (this is done once for the entire organization).
- Specifying the engagement time contract terms
- For engagements with fixed price time contract terms:
- Specifying a holdback amount (possibly zero)
- Specifying a revenue recognition method (percent complete or revenue schedule)
- Updating remaining work data – making sure that data relating to what work remains to complete the project is up to date; since this is part of the normal operations of using Projector, it is not described further in this section.
- Running the revenue recognition wizard. Click here for details.
Organizations need to set their own policies as to how often to adjust their recognized revenue and for which projects this process should take place. Most organizations perform revenue recognition once per accounting period.
Choosing the Percent Complete Basis
- person hours
- resource direct cost
- contract revenue
The preferred percentage of completion method of recognizing revenue, according to Generally Accepted Accounting Principles (GAAP), calls for revenue to be recognized in proportion to the percentage of total costs incurred compared with the total costs expected to be incurred in total. The resource direct cost basis is the most closely aligned with this approach, but the other choices may be reasonable if they don't cause a materially different result.
The percent complete basis is used in several ways within Projector:
- to recommend the amount of revenue to recognize when recognizing revenue (can be overridden by the user)
- to allocate recognized revenue to time cards
- to dynamically compute system revenue
How to Choose the Percent Complete Method for an Engagement
The percent complete method for an engagement can be either percent complete or revenue schedule. The method determines how system revenue is calculated for the engagement, as follows:
- Percent Complete: Projector computes system revenue based on the ratio of actuals to date to estimate at completion, using the metric defined by the percent complete basis (person hours, resource direct cost, or contract revenue).
- Revenue Schedule: Projector uses the amount of revenue scheduled to be recognized, regardless of the amount of work planned or completed. This is useful for organizations that want to recognize revenue according to a plan, especially where small variances in work done are not material.
How Projector Computes the Recommended Revenue to Recognize
The recommended revenue to recognized for an engagement is computed by the revenue recognition wizard. The computation applies only if the engagement's revenue recognition method is percent complete. If the method is revenue schedule then the amount of revenue to recognize in a specified time period must be exactly what is specified in the revenue schedule.
When using the wizard you choose a revenue recognition date, which is the date (usually the last day of an accounting period) through which revenue is to be recognized. Projector first computes the work done through the revenue recognition date (the actuals to date), and then computes the work done from the day after that date until the engagement is planned to be completed (the estimate to completion). The work is measured in units determined by the percent complete basis (i.e., hours, resource direct cost, or contract revenue). The recommended percent complete is the ratio of the actuals to date divided by the estimate at completion, where the estimate at completion is the sum of the actuals to date and the estimate to completion.
How Projector Allocates Recognized Revenue to Time Cards
For engagements configured to use the percent complete method of revenue recognition, the revenue recognition wizard enables the user to apply the recommended or overridden recognized revenue amount to time cards. For engagements configured to use the revenue schedule method of revenue recognition, the wizard applies the amount the scheduled revenue. In all cases the amount of revenue to recognize applies to the engagement on the whole. To enable understanding project profit at a fine-grained level Projector needs to allocated the revenue to individual time cards. This is always done using the percent complete method using a weighted average of the time card's contribution to the percent complete basis amount. For example, if a time card has 8 hours of work in a period where $16,000 of revenue was recognized for 80 hours then that time card will receive $1,600 of system revenue (10% of the total amount recognized).