Key Points of Revenue Recognition Criteria in Project Management

In April 2021, the principles of revenue recognition standards will begin. I think some of you have already started preparing. We also offer a project management tool called SI Object Browser PM (OBPM),so we have received consultations from customers about revenue recognition criteria. While responding to customer consultations and confirming with certified public accountants, we also collect information on revenue recognition standards. There are still some parts that are not clear, but I summarized the points of revenue recognition criteria to be grasped in project management.

what is the revenue recognition criteria?

It's already put together on many sites, but I'll keep it easy to keep in touch here.

summary

It was formulated based on International Financial Reporting Standards (IFRS) No. 15 of the International Financial Reporting Standards (IFRS) "Revenue generated from contracts with customers" in the Accounting Standards No. 29 "Accounting Standard for Revenue Recognition" (hereinafter referred to as the "Accounting Standard" (hereinafter referred to) and The Guidelines for The Application of Accounting Standards for Corporate Accounting Standards No. 30 (hereinafter referred to as "Guidelines").
Application Period In principle, it will be applied from the fiscal year starting on or after April 1, 2021.


Applicable Companies subject to accounting audits of certified public accountants are

eligible. Unlisted SMEs are not eligible.
Scope Covers revenue resulting from contracts with customers. However, transactions related to financial instruments, lease transactions, insurance contracts, exchange transactions of commercial products with other companies in the same industry, receipt fees related to financial instruments, and real estate transfer transactions are not eligible.

5 steps to revenue recognition

to understand revenue recognition criteria, it's important to understand the five steps of revenue recognition. i have seen various sites, but i think that the following table is easy to understand.
image1


in this blog, we will talk about contract development projects for software. in a contract development project, step 1: identify the contract, step 2: identify the obligation to perform, and step 5: recognition of revenue, as shown in bold in the figure above, are the major points to consider.

points in contract development projects (issues)

some of the issues we and our customers are interested in applying revenue recognition criteria for contract development projects include:

Do i have to combine contracts?

in contract development projects, it is customary to conclude multi-step contracts to respond to risks that may materialize during the course. when it comes to large-scale projects, i think that it is often advanced for each subsystem. in addition, installments may be conducted for financial reasons of customers and vendors. these relate to the scope of a project or contract, but the revenue recognition criteria relate to two requirements: 

step 1: "union of contracts" in the identification of contracts for multiple contracts concluded simultaneously or almost simultaneously with the same customer, (1) have the same commercial purpose, (2) the price of one contract is affected by the price or performance of the other contract, (3)

combine and process contracts if any of them fall under a single performance obligation (standard section 27).

step 2: "separate goods or services" in identifying performance obligations the goods or services promised to the customer can be identified in (1) the customer may enjoy benefits alone, (2) be distinguished by other promises included in the contract; shall be separate if any of them are met (standard section 34).
let's look at the individual cases.
 

Do i have to combine contracts by process?

in the case of waterfall format, the requirement definition is advanced by a quasi-delegation agreement, and after the basic design, i think that the contract is often concluded after re-estimating after the requirement definition is completed. in this case, individual contracts may be separately executed and the contract form is different, so the contract will not be combined and may be a separate performance obligation. if acceptance testing or migration assistance is a quasi-delegation agreement, it will be separate from the contract.

What happens to the contract for each subsystem?

a contract for each subsystem can be a separate performance obligation because it is easy to determine that the customer can enjoy the benefits on its own if the package adopted is different for each subsystem. on the other hand, if it is difficult for subsystems alone to fulfill the same commercial purpose, they are likely to combine and process contracts. if you are contracting at the same time, you will find that the union of contracts is inevitable.
 

Is division examination not allowed?

if the payment is split regardless of the process due to the convenience of the customer or vendor, or if the intermediate deliverables that the customer cannot benefit from are subject to acceptance, it is likely not to be considered a separate performance obligation. <
 

In which unit should i define the project?

 

the agreement between the customer and the vendor, of course, would be considered a single performance obligation if the contract could be deemed reasonable by a third party. defining a single performance obligation as a single project clears the scope of responsibility and enables efficient project management. in order to give the inspection at the end of the fiscal year, preparing deliverables that no one seriously verifies is something that only exhausts the site, so i want to avoid it.
in the case of waterfall format, i think that projects are often separated between requirement definition and basic design. in other cases, it may be easier to manage to divide projects into subsystems. on the other hand, since multiple projects are launched in one project, it is difficult to check the status of the entire project.



Obpm allows you to bundle up multiple projects to check the status of multiple projects using the group aggregation feature.

Note) Since it is simply aggregated, it does not support revenue recognition by combining contracts.

Is the progression standard gone?

With the start of application of Accounting Standard No. 29 "Accounting Standard for Revenue Recognition", Corporate Accounting Standard No. 15 "Accounting Standard for Construction Contracts" will be abolished. In the revenue recognition standard, the word "construction progress standard" does not appear, so there are an impactful phrase "construction progress standard is abolished" on the net, but what will happen in reality? In fact, the concept of the standard of progress itself remains.
Step 5: In recognition of earnings, it is necessary to determine whether the obligation to perform is satisfied over a certain period of time (Standard Paragraph 38), such as the Progress Standard (Standard Paragraph 38) or as a completion standard at a time (Standard Paragraph 39).
According to Standard Section 38, if any of the following requirements are met, the performance obligation will be satisfied for a certain period of time, such as the progress criteria, and revenue will be recognized.
(1) As a company fulfills its contractual obligations with the client, the customer benefits (2) the company's performance of its contractual obligations with the client results in the creation of assets or increased value of the assets, and the customer's control of the

assets;
(3) The company's performance of its obligations in the contract with the client creates (1) assets that cannot be diverted for another

purpose, and (2) has a compelling right to receive consideration for the completed portion. If the performance obligation is not satisfied for a certain period of time, we will recognize the revenue as being satisfied at one point, such as the completion standard. The criteria and guidelines do not indicate how long a certain period of time will be, but since financial results are required every quarter, the timing of the quarter or three months may be the basis for judgment.

How do you measure the progress?

If it is determined that the performance obligation fulfilled in a contract development project will be satisfied for a certain period of time, such as the progress standard, the progress level related to the fulfillment of the performance obligation will be estimated (Standard Paragraph 41). There are two ways to rationally estimate this progress: the Output Act (Paragraphs 17 to 19 of the Guidelines) and the Input Act (Paragraphs 20 to 22 of the Guidelines).

Output method - Measure the results achieved, milestones achieved, elapsed time, number of production units, and number of units
delivered.

・ InEVM, the estimated gross cost(BAC)÷ volume(EV)calculated from the progress of each task represents the progress. It is also called the input
method and the cost proportional method.


・ In EVM, the estimated total cost (BAC) ÷ incurred cost (AC) represents the progress.
Which method to choose is based on the nature of the goods or services provided to the
customer. According to the fact-finding survey of each institution, less than 20% of contract development projects apply the current construction progress criteria, but most of them adopt the cost proportional method.



Obpm specifies the cost proportional method (input method) and EVM method (output method) for each project. If you select the cost proportional method, the progress is calculated based on the accrued cost.



If you select the EVM method, progress reflects the progress rate of the Gantt chart.




Whichever method you use, it is the estimated total cost that determines whether the progress is faithful. In the output method, missingWBS causes an "eternal 90%state". In the input method, there is a case of Toshiba's powder settlement, in which the gross estimated cost was underestimated to cheat the progress level and inslated profits. The estimated gross cost is validated against the estimated gross cost (actual cost + planned cost). If the estimated total cost exceeds the estimated total cost, you must review the estimated gross cost. If the estimated total cost exceeds the total order value, the reserve for the loss of orders will be recorded (Guideline, Paragraph 91).


Obpm checks the discrepancy between the estimated gross cost and the estimated total cost, and if the threshold you set in advance is exceeded, the warning can be displayed as shown in the figure above.

How do you handle the collective consignment?

In contract development projects, the development process may be collectively entrusted to partner companies. Let's consider how to reflect the collective consignment of the progress related to the fulfillment of the performance obligation.

• If the output method is adopted, the output method will also be used to understand the batch consignment.
• Check the amount of deliverables at the end of each month at the progress report meeting with partner companies. It is a good idea to specify how to check the progress in the individual contract. If it is difficult to measure the amount of deliverables rationally, the progress will be captured by the elapsed days ÷ the total number of days. The progress you check will be reflected in the Gantt chart.
• If you are using the input method, you should consider how to reflect the cost of the lump sum consignment.
• Outsourcing costs for collective consignment are recorded by inspecting deliverables delivered from partner companies, but if the progress is reflected only in the inspection month, the progress level will change between in-house production and outsourcing of the same work, so it may be judged that there is no rationality. As in the case of the output method, it is necessary to consider reflecting the cost of the lump sum consignment every month ÷ the number of days elapsed and the total number of days, and consult with the certified public accountant in charge.
• Obpm allows you to record the cost of a lump sum consignment every month according to the progress of eachimage7-2month. The example in the figure above reflects the cost of 10 million yen in three months every month by prorated in days.

what are cost collection criteria?

In the revenue recognition standard, a method called cost collection standard has appeared. In a nutshell, the cost collection basis is to treat the current month's accrual cost as sales for the current month, but in what case is it applied? ・

When the performance obligation is satisfied for a certain period of time, such as the progress standard, but the degree of progress pertaining to the fulfillment of the performance obligation cannot be reasonably estimated (Standard 45 )・ Only when it is expected to recover the costs incurred when the performance obligation is satisfied,

Limited by the time when progress can be reasonably estimated

• (Standard Paragraph 45)・ If, in the early stages of the contract, the progress pertaining to the fulfillment of performance obligations cannot
• be reasonably estimated, recognize the earnings from the time the progress level can be reasonably estimated without recognizing the revenue (Guideline No. 99).
• The application of cost collection criteria is likely to be a significant exception case because it is not allowed in the early stages of the contract.
• Obpm does not have a system for recording sales based on cost collection criteria, but it is possible to record sales after it is possible to reasonably estimate the progress without recording sales in the early stages of the contract.

points in contract development projects (summary)

Above, we have looked at the points of revenue recognition criteria in contract development projects. Since no clear criteria are given for all cases, there is a possibility that the views may be divided by the certified public accountant who conducts the audit. We recommend that you thoroughly consult with your certified public accountant before considering the operation.

Finally, we summarize the points of revenue recognition criteria for contract development
projects. 

◆ If it is a reasonable contract even if a third party sees, a single performance obligation = one project will be managed.

◆ There is also a way of thinking about progress standards and completion standards in the revenue recognition standard. 

◆As for progress standards or completion standards, the judgment of the certified public accountant in charge shall be followed.

 ◆ The cost collection basis is the treatment of exception cases. If you are interested in OBPM, you can view the demo, so please contact



Support for the revenue recognition criteria of the project management tool "SI Object Browser PM" Reference)

• ・ Corporate Accounting Standards Committee (ASBJ) "Accounting Standard No. 29: Accounting Standards for Revenue Recognition"
• ・ Corporate Accounting Standards Committee(ASBJ), "Guidelines for Application of Corporate Accounting Standards No. 30: Guidelines for The Application of Accounting Standards for Revenue Recognition" and examples