| # Revenue Recognition (RR) and Cost of Goods Sold (COGS) The purpose of recognizing revenue is to calculate revenue and to register the revenue in the project financial data. For long term contracts extending over accounting periods, recognition of revenue is permitted before the contract is complete. This information is later sent to Financials. Cost of Goods Sold (COGS) is the expense a company incurs in order to manufacture, create, or sell a product. It includes the purchase price of the raw material as well as the expenses of turning it into a product. For a given contract, revenue recognition is the process that leads to the calculation (and subsequent posting to the General Ledger) of the total revenue that the contractor estimates he has ‘earned’, based on the progress of the contract. This amount is independent of the amounts that have been billed/invoiced to the customer and does not represent any kind of cash flow. For a given contract, cost of goods sold is the amount of money spent in the process of building a deliverable (for which revenue can be recognized) or the money spent on non-recurring activities (such as engineering design) that have been completed. Cost of Goods Sold transactions are posted to the General Ledger. The transaction currency of the generated RR and COGS lines matches the project currency. While generating the RR and COGS for a new period, you can settle the previous financial results. When closing the project, the final calculation and the postings are done and the financial results are reversed. Revenue Recognition and Cost of Goods Sold can be determined at the project, extension, element and activity level depending on the method you select. The usage of element and activity depends on whether the project is controlled by element or controlled by activity. Generate Financial interim results You can select the RR and COGS methods to generate the financial interim results in the Generate Financial Interim Results (tpppc2260m000) session, with the exception of the Completed Project method. Revenue recognition limit You can set a limit on the revenue to be recognized. A maximum percentage is defined on the project and extension level. The default value is set to 100%, but this value can be overwritten. The percentage times the contract amount gives the maximum revenue that can be recognized (until the completion of the project). The revenue recognition limit is valid for all RR methods except the Completed Project method. Note This percentage is ignored when the project is closed and the final revenue (and COGS) is posted. Methods to recognize revenue: Completed Project Method (RR) Percentage Complete Method Milestone Method Reimbursement Contract Method Earned Revenue Factor Method Actual Revenue Method Methods to determine COGS: Completed Project Method (COGS) Profit Percentage method Reimbursement Contract Method RR types allowed per contract type
Fixed Price Contract | Cost Plus
--- | ---
Completed Project | Completed Project
Percentage Complete | ----------
Earned Revenue Factor | ----------
Actual Revenues | Actual Revenues
Milestones * | Milestones *
---------- | Reimbursement
* Only for projects controlled by activity. COGS applicable for various RR types
RR Type | Applicable COGS
--- | ---
Completed Project | Completed Project
Reimbursement | Reimbursement
Percentage Complete | Profit Percentage
Actual Revenues | Profit Percentage/ Reimbursement
Milestones * | Profit Percentage
Earned Revenue Factor | Reimbursement
* Only for projects controlled by activity. RR types allowed per invoice calculation method (for extensions)
Contract Amount | Budgeted Costs | Actual Costs
--- | --- | ---
Completed | Completed | Completed
Actual Revenues | Actual Revenues | Actual Revenues
Percentage Complete | Percentage Complete | -----------
Earned Revenue Factor | Earned Revenue Factor | -----------
Milestones * | Milestones * | Milestones *
----------- | ---------- | Reimbursement
* Only for projects controlled by activity. Levels at which RR and COGS is calculated for the various methods
RR Type | Applicable COGS | Levels
--- | --- | ---
Completed Project | Completed Project | Project Extension
Reimbursement | Reimbursement | Project Extension Element Activity
Percentage Complete | Profit Percentage | Project Extension
Actual Revenues | Profit Percentage/ Reimbursement | Project Extension Element Activity
Milestones * | Profit Percentage | Project Extension
Earned Revenue Factor | Reimbursement | Project Extension Element Activity
* Only for projects controlled by activity. |