Project Partners Blog


Project Partners’ blog series examines the impacts of the ASC 606 revenue recognition standards and how the use of Oracle E-Business Suite (EBS) Projects can facilitate compliance with the new standards. We continue here by discussing the fourth step to revenue recognition under the new standard: Allocate the Transaction Price.

Part of our ASC 606 New Revenue Recognition Standards blog series. Previous posts include: Introduction to Achieving ASC 606 ComplianceStep 1: Identify the Contract with the CustomerStep 2: Identify Performance Obligations in the ContractStep 3: Determine the Transaction Price – Revenue Recognition Standards.

ASC 606 Revenue Recognition Standard Step 4 Allocate the Transaction Price

Step 4: Allocate the Transaction Price comes into play when a contract contains more than one performance obligation.  The seller should allocate the total amount of the selling price to each performance obligation based on its relative Standalone Selling Price (“SSP”).  The Standard permits any method of allocation of the SSP as long as the estimation is an accurate representation of what price would be charged in separate transactions.

ASC 606 does mention three acceptable methods of allocation, discussed in their section on SSP.  These methods include adjustment market assessment, expected cost plus margin and residual.

Allocating Variable Consideration and Volume Discounts
If the contract includes any variable consideration or discounts, and there are multiple performance obligations in the contract, the consideration should only be allocated to the performance obligation to which it is related.

Using Oracle EBS Projects to Meet the Objectives of Step 4 of the ASC 606 Revenue Recognition Standards

Again, let’s review the three types of contracts typical to service delivery organizations:

  • Service Contracts based on selling hours (Time & Expense-“T&E”): In this scenario, the delivery organization contracts to provide a specified number of hours of specialized resources to meet the client’s requirements. There are no specific deliverables listed in the contract. These types of contracts are slowly disappearing as clients demand more specifics before signing contracts.
    • Pure Professional Service Organizations (“PSO”) – Management Consulting
  • Time & Material (“T&M”) Service Contracts based on specific Deliverables AND Fixed Price Service Contracts based on Milestones: These are very typical service contracts. They are combined together here even though they have completely different billing methods because they will need to be treated the same for revenue recognition purposes under the new standard. Additional contract types, such as Cost Plus or some variant of this with different types of fees, will also fall under this category for Revenue Recognition as long as these contracts all specify obligations or deliverables on the service provider.
    • PSOs, Engineering, IT Services, Marketing/Advt. Services
  • Unit Price Based Contracts: Commonly referred to as Schedule of Values (SOV) contracts. These contracts typically specify numbers of units to be delivered for one or more types of items after an initial design/confirmation period.
    • Construction, ATO/ETO based Manufacturing Firms
    • Schedule of Values functionality is delivered in release 12.2.5

Now, we’ll use Oracle E-Business Suite (EBS) Projects to complete Step 4, allocate the transaction price across obligations, for each of the three service contracts discussed.

Allocate the total contract price across obligations and set up in Projects as follows:

Service Contracts based on selling hours (T&E)

Setup Hourly Bill Rates and assign to Project.

Step 4 to Allocate the total contract price across obligations

 

Step 4 requires you to setup Hourly Bill Rates and assign to Project

 

T&M Service Contracts based on specific Deliverables and Fixed Price Service Contracts based on Milestones

Setup a Billing Action for each Deliverable and assign a Billing Event type for revenue recognition and allocated price.

Step 4 for Time and Material and Fixed Price Service Contracts

 

Step 4 billing for Time and Material and Fixed Price Service Contracts

Unit Price Based Contracts

For each SOV line, setup a unit price and total line amount based on allocated values.

Step 4 for Unit Price Based ContractsYou will also need to assign each SOV line to a task on your work plan and publish it.

Oracle EBS Projects can be used to help you meet the ASC 606 requirements and achieve revenue recognition compliance. Our New Revenue Recognition Standards blog series demonstrates how project-centric companies can use Oracle EBS Projects to manage and comply to the new standards with minimum disruption to existing business practices.

In the next blog in the series we will cover Step 5: Deliver Services and Record Outcome.

Learn more on managing ASC 606 revenue recognition with Oracle E-Business Suite (EBS) Projects –
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Project Portfolio Management (PPM) is about more than just managing multiple projects.  A PPM solution provides centralized visibility into the entire project portfolio to help planning and scheduling teams identify the most suitable approach to deliver projects and programs. A successful Project Portfolio Management solution consists of three fundamental components that must be implemented in adherence to business value and strategy.

1 – Project Selection

To be successful with project portfolio management, you should select and initiate projects based on your organizational capabilities and goals.  In order to do this, you should have a systematic method and decision process.

A good way to start is by gathering a Project Inventory  current projects.  Here are some examples of information you will want to capture.  You will want to capture the goal of the project, project dates, resources being allocated to the project by role and other criteria, the risk of the project (may be as simple as High, Medium, or Low); the expected return of the project, and who benefits from the project.

You will also want to Score and Categorize Your Projects.  To do this, identify logical criterion for scoring and categorizing projects (e.g. strategy alignment, limiting risk, increasing efficiency, increasing sales, reducing expenses or process steps, Benefits/Feasibility, legal, regulatory, security, etc.).  Set up a scoring mechanism for each project based on the criteria (Note:  The scoring range will be agreed on for each criterion and each person can score projects based on their biases).  Aggregate or average the scores from all individuals to come up with a score for each criterion for each project.

Once completed, you will now gather your project inventory including the scores along with current and forecast costs (for new projects, use expected costs).  List your projects by rank order based on scores and put a line under the project sum equaling your total available portfolio budget (Note: Rank may not be based on score alone. Modify your total budget based on any contingency funds you are holding).  Projects above the line can be initiated or are already in progress.  Projects below the line are held in reserve should you kill or cancel other projects or come up with more money.

2 – Project Resources

No company has the resources to meet all of its business needs in the best of times and even more importantly when times are tough.  PPM gives you visibility into resource availability and allocation across your project portfolio. By ranking and prioritizing projects, you’ll be able to strategically allocate resources and maximize project delivery.

To be successful with project portfolio management, you should know where your people are working and what more can be done with available capacity.  You don’t have to have sophisticated tools to track your resources but you do need common methods for definition of resource information (location, department, division, etc.); competencies (skills and levels), where the resource is currently being allocated (both project and non-project); and resource development opportunities.

To start, define your resources using the information identified above and more if needed.  Establish each resource’s available capacity to work based on their project focus and the resource calendar.  You will then inventory your Total Resource Capacity (TRC) by resource and aggregate individual resource capacity by role (Note:  If a resource has multiple roles, you will have to define how to split out their TRC by role). For each resource, sum up their total allocation to current projects.  This is their Project Allocated Capacity (PAC).  You can do the same for each role across all active or proposed projects.  Finally, you can compute the Total Available Capacity (TAC) by computing TAC = TRC – PAC.  Do for both resources and roles over time.  You’ll be able to forecast the availability of resources for future projects by capacity and role needed.

3 – Project Information

Project portfolio management relies heavily on accessibility and accuracy of information. You should have common procedures, applications, and training for the effective sharing of relevant information to drive portfolio analysis, decision making, goal setting, project status, project prioritization/ranking, and consumed and available resource capacity.

Throughout the project lifecycle, from intake to closeout; be sure to communicate risks, issues, decisions, changes, lessons learned, and actions taken and document the reasoning for each.  Set up logs for each project to track the information and make the information available to all stakeholders.

Successful PPM relies on these three fundamental components and must be managed in adherence to business value and strategy. When implementing a Project Portfolio Management solution, keep in mind that change should be managed at both the organization and project levels.  A corporate change management (organizational change) discussion may be a great way to introduce a PPM solution and get everyone on board.

Learn more: 5 Major Benefits of Implementing a Project Portfolio Management Solution

Optimize your PPM implementation with Oracle Instantis EnterpriseTrack. This end-to-end PPM solution provides a top-down approach to managing, tracking, and reporting on enterprise strategies, projects, portfolios, processes, resources, and results.

For more information visit our Resource Library

Part of our ASC 606 New Revenue Recognition Standards blog series. Previous posts include: Introduction to Achieving ASC 606 Compliance, Step 1: Identify the Contract with the Customer, and Step 2: Identify Performance Obligations in the Contract.

This blog continues our discussion on the impacts of the new ASC 606 revenue recognition standard issued by FASB and IASB and reviews the third step in the five-step model for recognizing revenue from contracts with customers.

Step 3 Determine the Transaction Price

The Transaction Price is the amount of consideration an entity expects to receive for the transfer of goods or services to the customer.  The amount can be fixed, variable, or a combination of both.  Transaction Price is allocated to the identified performance obligations in the contract.  These amounts are what are recognized as revenue when the performance obligation is fulfilled.

Future options for a contract are excluded when determining Transaction Price, as are the amounts third parties will eventually collect, like sales tax.

When dealing with a fixed amount to be received, Transaction Price is easy to determine.  However, other situations require more judgment:

Variable Consideration
If the amount of consideration is subject to change due to timing or other performance factors, it is considered variable.  Examples would be refunds, credits, discounts, incentives and other items of this type.  Since the Transaction Price is an estimate on the amount of consideration an entity expects to receive, any constraints on that amount must be considered.

Significant Financing Component
This occurs when the timing between the receipt of consideration and the transferring of goods/services is more than one year.  The entity must therefore recognize revenue at an amount that reflects the cash payment the customer would have made at the time the goods/services were transferred to them (cash selling price).  Financing components in the Transaction Price therefore considers the time value of money.

Noncash Consideration
If a customer receives payment in a noncash form, then the fair value of the noncash payment is included in the Transaction Price.  If the fair value cannot be determined, the standalone selling price of the goods/services is used.

Consideration Paid or Payable to a Customer
At times the entity will be required to make a payment to the customer, such as with a manufacturers rebate.  This payment reduces the Transaction Price and the revenue recognized.  In some cases, however, this could be considered a purchase expense from the customer.

Nonrefundable Upfront Fees
Membership fees or activation fees for services such as television or internet services are examples of a nonrefundable upfront fee.  These fees are paid in advance for the right to a service or good with no guarantee that the fee payment will be returned.  The entity must make the determination whether the fee relates to a specific transfer of goods/services or a renewal option at a reduced price.  The changes in the new Standard require that all products and services must have a Standalone Selling Price (“SSP”).  This SSP must represent the fair value of the products and services being offered.  All entities need to monitor and adjust their SSP on a regular basis, at least annually.

Using Oracle Projects to Meet the Objectives of Step 3 of the ASC 606 Revenue Recognition Standards

In our previous paper, we described three types of contracts typical to service delivery organizations:

  • Service Contracts based on selling hours (Time & Expense-“T&E”): In this scenario the delivery organization contracts to provide a specified number of hours of specialized resources who in turn will deliver to the client’s requirements. There are no specific deliverables listed in the contract. These types of contracts are slowly disappearing as clients demand more specifics before signing contracts.
    • Pure Professional Service Organizations (“PSO”) – Management Consulting
  • Time & Material (“T&M”) Service Contracts based on specific Deliverables AND Fixed Price Service Contracts based on Milestones: These are very typical service contracts. They are combined together here even though they have completely different billing methods because they will need to be treated the same for revenue recognition purposes under the new standard. Additional contract types like Cost Plus or some variant of this with different types of fees will also fall under this category for Revenue Recognition as long as these contract all specify specific obligations/deliverables on the service provider
    • PSOs, Engineering, IT Services, Marketing/Advt. Services
  • Unit Price Based Contracts: Commonly referred to as Schedule of Values (SOV) contracts. These contracts typically specify numbers of units to be delivered for one or more types of items after an initial design/confirmation period
    • Construction, ATO/ETO based Manufacturing Firms
    • Schedule of Values functionality is delivered in release 12.2.5

We will continue to Step 3 using the case studies previously discussed.

T&E Services, including T&M Service Contracts based on specific Deliverables and Fixed Price Service Contracts based on Milestones

The total transaction price identified in the contract will be setup in Oracle as the Project Agreement and the funding of the project from the agreement as shown below:

Unit Price Based Contracts

The total transaction price identified in the contract will be setup in Oracle as the contract amount under the SOV setup.

As you can see Oracle Projects provides the ability to configure your projects to meet the requirements of Step 3 of the new ASC 606 guideline with standard functionality. The next blog in the series we will cover Step 4: Allocate the Transaction Price.

Oracle Licensing Requirements

  • Project Costing and Billing are required for all features discussed in this paper
  • Project Planning and Control must be implemented to leverage Deliverable functionality
  • Schedule of Values functions are available in Oracle Project Planning and Control release 12.2.5

Up next – Step 4: Allocate the Transaction Price – Revenue Recognition Standards

Learn more on managing ASC 606 revenue recognition with Oracle E-Business Suite (EBS) Projects-
Read the white paper
View the presentation

Questions?
Contact Us!

This paper is part of the blog series on the impact of ASC 606 and how the use of Oracle Projects can facilitate compliance with the new revenue recognition standards.  Previous posts on this subject covered an Overview of the ASC 606 and Step 1: Identify the Contract with the Customer.  This paper addresses Step 2: Identify the Performance Obligations in the Contract.

ASC 606 Revenue Recognition Standards Step 2 Identify the Performance Obligations in the Contract

This step requires an entity to identify all the distinct performance obligations in a contract or arrangement.

A performance obligation (commonly referred to as deliverables) is a promise to transfer goods or services to a customer.  A good or service is distinct when the customer can benefit from said good or service on its own or with resources the customer already has, and the good or service can be transferred to the customer independent of other performance obligations in the contract.  Goods and services that are not distinct should be combined with other goods or services until the whole group is distinct.

In addition to performance obligations explicitly outlined in a contract, obligations that a customer may expect because of an established business history must be examined.  For example, if a vendor has always provided free shipping to a customer, and the customer therefore expects the goods to be shipped for free, the shipping would represent a performance obligation even though it is not specifically stated in the contract.

How to Determine When a Good or Service is Distinct

To be distinct, a good or service must meet two criteria:

  1. It must be capable of being distinct, and
  2. It must be separately identifiable.

The first criterion is similar to standalone value, originally defined in ASC 605.  The customer should be able to benefit from the good or service on its own or in combination with other resources it has on hand.

The second criterion is a new concept.  The underlying concept in determining whether a good or service is separately identifiable is the notion of “separable risks”.  Separable risks relate to whether the risk associated with the obligation to transfer the goods/services are separate from the risk associated with the transfer of other goods/services.  Interpretation of this concept has varied, and the Board decided that entities should evaluate if promised goods/services represent individual promises or inputs in making up a combined output.

The Standard puts forth three factors that may indicate when goods/services are not separately identifiable and should be combined as one performance obligation:

  1. The entity provides a significant service of integrating the good/service with other goods/services in the contract
  2. The good/service significantly modifies or customizes another good or service in the contract
  3. The good/service is highly interrelated or dependent upon another good or service in the contract.

These factors should not be used exclusively to determine if they are separable, and the Board requires the use of judgment by the entity of all facts and circumstances within the contract.

Factors Affecting an Entity’s Evaluation of Performance Obligations

Principal vs Agent

If other parties are involved in providing goods or services to an entity’s customer, the entity must determine whether its performance obligation is to provide the goods/services themselves (Principal) or to arrange for another party to provide the goods/services (Agent).  This will determine the amount of revenue that the entity can recognize.  If the entity is the principal, it will recognize the gross amount received from the customer, but if the entity is the agent, they can only recognize the amount of fee or commission received for facilitating the sale.  This identification is critical to correctly recognizing revenue in these situations.

Warranties

The new standard now distinguishes two different types of warranties which are accounted for differently.  An Assurance-Type Warranty only guarantees that the good/service functions as promised and is not a distinct performance obligation.  A Service-Type Warranty provides benefits beyond what the Assurance Warranty offers and would create a distinct performance obligation.

Customer Options for Additional Goods or Services

This would pertain to options like customer loyalty points or discounted contract renewals.  If the option provides a material right to the customer, then a distinct performance obligation is created.  A material right is not clearly defined, but must be more than the standard discount available.

Nonrefundable Upfront Fees

This is similar to a customer option.  For example, a customer signs up for a martial arts class with a one-year contract and an upfront fee is charged.  That fee is not required when the customer renews his contract.  Because the second year is being purchased at a “discount”, a material right is created and should be accounted for as a distinct performance obligation.

Stand-Ready Obligations

This can happen either through contract specifications or customary business practices.  This happens when an entity is required to have services ready whenever a customer decides to use them.  An example would be a 24-hour health club.  Revenue received is recognized over the period of time an entity offers the stand-ready service.

Rights of Return

A right of return obligates a customer to accept the product should it be returned.  This adds variability to the transaction price and should be considered when evaluation variable consideration.

Using Oracle Projects to Meet The Objectives of Step 2 of ASC 606

In our previous paper, we described three types of contracts typical to service delivery organizations:

Service Contracts based on selling hours (Time & Expense-“T&E”): In this scenario the delivery organization contracts to provide a specified number of hours of specialized resources who in turn will deliver to the client’s requirements. There are no specific deliverables listed in the contract. These types of contracts are slowly disappearing as clients demand more specifics before signing contracts.

  • Pure Professional Service Organizations (“PSO”) – Management Consulting

Time & Material (“T&M”) Service Contracts based on specific Deliverables AND Fixed Price Service Contracts based on Milestones: These are very typical service contracts. They are combined together here even though they have completely different billing methods because they will need to be treated the same for revenue recognition purposes under the new standard. Additional contract types like Cost Plus or some variant of this with different types of fees will also fall under this category for Revenue Recognition as long as these contract all specify specific obligations/deliverables on the service provider.

  • PSOs, Engineering, IT Services, Marketing/Advt. Services

Unit Price Based Contracts: Commonly referred to as Schedule of Values (SOV) contracts. These contracts typically specify numbers of units to be delivered for one or more types of items after an initial design/confirmation period.

  • Construction, ATO/ETO based Manufacturing Firms
  • SOV functionality is introduced in release 12.2.5

We will continue to Step 2 using the case studies previously discussed.

Service Contracts Based on Selling Hours (T&E)

Budget for contracted number of hours.

Edit budget and forecasts - Service contracts

 

Service Contracts based on selling hours - Identify Performance Obligations for Revenue Recognition

 

Time & Material Service Contracts AND Fixed Price Service Contracts 

Enable and setup deliverables for each performance obligation.

Time and Materials and Fixed Price Service Contracts - Setup deliverable

 

 

Unit Price Based Contracts

Enable Schedule of Values (“SOV”) lines with Type, and Number of each contracted item.

Unit Price Contracts-Enable Schedule of Values-Revenue Recognition Standards


Unit Price Contracts-Schedule of Values-Revenue Recognition Standards

As you can see, Oracle Projects provides the ability to configure your projects to meet the requirements of Step 2, Identify the Performance Obligations in the Contract, of the new ASC 606 guideline with standard functionality.  In our next blog of the series we will cover Step 3: Determine the Transaction Price and Step 4: Allocate the Transaction Price.

Oracle Licensing Requirements

  • Project Costing and Billing are required for all features discussed in this paper
  • Project Planning and Control must be implemented to leverage Deliverable functionality
  • Schedule of Values functions are available in Oracle Project Planning and Control release 12.2.5

Up next – Step 3: Determine the Transaction Price – Revenue Recognition Standards

Learn more on managing ASC 606 revenue recognition with Oracle EBS Projects-
Read the white paper
View the presentation

Questions?
Contact Us!

What is Project Portfolio Management? Project Portfolio Management (PPM) is used by organizations to strategically identify, select, and manage their portfolio of projects in alignment with key performance metrics and strategic business objectives.

Major benefits of implementing a Project Portfolio Management (PPM) solution

1 – Encourages business leaders to think “team” not “me” and to take responsibility for projects

By viewing all of the possible project investments as one in a portfolio rather than as individual projects, it’ll enable a balanced perspective when prioritizing, selecting, and sustaining projects. By comparing the projects together, factors of the portfolio can be managed by tweaking the projects within the portfolio (macro) instead of attempting to make changes at the project level (micro).

2 – Maximizes the value of project investments while minimizing the risk

One project’s mix of high risk with high potential return may not be acceptable by itself, but when mixed with other low-risk projects, it may become acceptable to the company; especially when considering the alignment with corporate goals or the need to bring a new technology or product to market to stay competitive. When projects are treated as corporate investments in a portfolio, corporate approval and standards occur at the portfolio level and not at the project level.

3 – Reduces the number of redundant projects and make it easier to kill or put projects on hold

Looking at all possible project investments in a portfolio will allow you to see redundancy across the portfolio. Looking at projects by department, division, or line of business won’t provide this clarity. When viewing the entire portfolio and considering other factors, such as alignment with corporate goals or the need to bring a new technology or product to market, it will be easier to discontinue unnecessary projects, reclaim the investment where possible, and release resources for more strategic projects.

4 – Improves communication and alignment between departments and business leaders

Looking at your portfolio of projects as a whole will not only provide a balance when prioritizing, selecting, and sustaining projects; it will improve communication within management with an increase in collaboration on management of the portfolio. It will also diminish preference for aligned projects to a department or a business leader and encourage management to work as a more cohesive team.

5 – Allows planners to schedule resources more efficiently

No company has the resources to meet all of its business needs. Having visibility to all resources across your project portfolio and being able to prioritize where to apply those limited resources are key aspects of a PPM solution. The corporation can track all resources to their assigned projects and apply a prioritization and approval process that maximizes the value delivered by a project. When projects are completed or are cancelled, resources can be redeployed to focus on new priorities.

Project Portfolio Management delivers the centralized visibility to help planning and scheduling teams identify the most suitable approach to deliver projects and programs.  For PPM success, our project experts recommend Oracle Instantis EnterpriseTrack as it helps provide the transparency of performance needed by management to monitor project portfolio progress against the strategic plans of the business.

To learn how to architect a Project Portfolio Management solution with Oracle Instantis EnterpriseTrack, click here.

For more information visit our Primavera Resource Library

ASC 606, Revenue From Contracts With Customers is the newest revenue recognition standard issued by FASB and IASB. The new standard provides a five-step model for recognizing revenue from contracts with customers. This blog outlines the first step, Identify the Contract with the Customer, and demonstrates how to complete step 1 for the three common contract types.

ASC 606 Revenue Recognition Step 1 - Identify the Contract with the Customer

What is a Contract?
The new revenue guidance defines a contract as an agreement between two or more parties that creates enforceable rights and obligations. The essential parts of a contract include:

  1. All parties have approved the agreement – Contracts may be written, oral or implied by an entity’s normal business practices. Contract enforceability is a matter of law, and as such, an entity should consider the legal jurisdiction in which it operates as the rules for contract enforceability.
  2. All parties are committed to fulfilling their obligations – If each party has the unilateral right to terminate a wholly unperformed obligation, then the standards states that no contract exists. This criterion addresses termination clauses.
  3. Each party’s rights are identifiable – The agreement must clearly identify the goods and/or services to be provided. If this cannot be accomplished, there is no way to determine when a transfer of control has occurred, which is a prerequisite for recognizing revenue.
  4. The contract has commercial substance –This means that a contract can only exist if the risk to the customer, timing of the delivery of goods/services or the amount of cash flows to an entity are expected to change as a direct result of the contract.
  5. Collectability is probable – the new standard requires vendors to evaluate a customer’s credit risk at the inception of the contract. Revenue can only be recognized when payment is likely to be received.

Other Considerations for Revenue Recognition:

Payment for Agreement with No Contract
When payment is received for an agreement that does not qualify as a contract, the vendor can only recognize revenue when one of two events occurs. Either the agreement has been terminated and the payment received is not refundable, or the vendor does not owe any goods or services to the customer and all of the transaction price has been received and is not refundable.

To illustrate: A developer enters into a contract to sell a building to a customer who plans to open a retail shop. The developer receives a non-refundable deposit from the customer. The remaining amount owed is to be paid over time from the shops revenues. There is significant risk that the remaining amount will be collected, so a contract does not exist according to the standard. The upfront deposit cannot be recognized as revenue until substantially the entire remaining amount owed is received, or the shop closes and the contract is terminated.

Combining Contracts

If multiple contracts with the same vendor are entered into at or near the same time and meet at least one of the following criteria, the standards requires the vendor to combine the contracts into one contract.

  • Contracts are negotiated as a single package with one business objective.
  • The payment amount for one contract is dependent on the performance of the other contract.
  • At least some of the promised goods or services in the contracts are a single performance obligation.

ASC 606 gives vendors the option to use the portfolio method of contract combination, permitting vendors to combine contracts that would otherwise not be combined in order to simplify the revenue recognition process. This method will only be allowed if the result is not materially different from accounting for each contract individually.

Contract Modifications

Parties to a contract may change the transaction price and/or scope of the contract. These changes may be accounted for as a separate contract or as a modification to the existing contract, depending upon circumstances. The final part of this series will address contract modifications in more detail.

CASE STUDIES
To demonstrate how to effectively use Oracle EBS Projects to drive compliance with ASC 606 Revenue Recognition standards, the following case studies will be presented for each step outlined in the new revenue standard.

Case Study 1: Service Contracts based on selling hours (T&E)

Service Contracts based on selling hours (Time & Expense-“T&E”): In this scenario, the delivery organization contracts to provide a specified number of hours of specialized resources who in turn will deliver to the client’s requirements. There are no specific deliverables listed in the contract. These types of contracts are slowly disappearing as clients demand more specifics before signing contracts. Most often, these contracts are used in Pure Professional Service Organizations (“PSO”) in Management Consulting.

For service contracted based on time & expense billing, the Project would be set up as shown below.
Work Based Revenue Recognition – Accrues revenue as work occurs.

Service Contracts based on selling hours (T&E)

 

Case Study 2:  Service Contracts based on Deliverables / Milestones

Time & Material (“T&M”) Service Contracts based on specific Deliverables AND Fixed Price Service Contracts based on Milestones are very typical service contracts. They are combined together here even though they have completely different billing methods because they will need to be treated the same for revenue recognition purposes under the new standard. Additional contract types like Cost Plus or some variant of this with different types of fees will also fall under this category for Revenue Recognition as long as these contract all specify specific obligations/deliverables on the service provider. These contracts are commonly used by PSOs, Engineering, IT Services, Marketing/Advt. Services organizations.

For Contacts based on specific Deliverables or Fixed Price Contracts based on Milestones, the Projects will be setup as follows:

Event Based Revenue Recognition – Accrues revenue and bills based on events.

Service Contracts based on Deliverables -Milestones

 

Case Study 3: Unit Price Based Contracts
Unit Price Based Contracts: Also referred to as Schedule of Values (SOV) contracts. These contracts typically specify numbers of units to be delivered for one or more types of items after an initial design/confirmation period. These contracts are commonly used by Construction and ATO/ETO based Manufacturing Firms.

  • SOV functionality is introduced in release 12.2.5

For Contacts based on Unit Price, the Projects will be setup as follows:
Schedule of Values Enabled Project – Accrues revenue based upon events defined in a Schedule of Values.

Unit Price Based Contracts

 

As you can see Oracle Projects provides the ability to configure your projects to meet the requirements of Step 1 of the new ASC 606 guideline with standard functionality. In the next blog in the series we will cover step 2 Identify the Performance Obligations in the Contract.

Oracle Licensing Requirements

Our Revenue Recognition Standards blog series will demonstrate how project-centric companies can use Oracle EBS Projects to manage and comply to the new standards with minimum disruption to existing business practices.

Up next – Step 2: Identify Performance Obligations in the Contract – Revenue Recognition Standards

Learn More on managing ASC 606 revenue recognition with Oracle EBS Projects-
Read the white paper
View the presentation

Are You Ready for the New Revenue Recognition Standards?

Part one of the six-part blog series

On May 28, 2014, FASB and IASB jointly issued ASC 606, Revenue From Contracts With Customers. The new standard will significantly affect current revenue recognition practices of many companies.

Depending upon the business’ current model and revenue recognition practices, this standard could have a significant impact on the amount and timing of revenue recognition, which in turn, will impact key performance measures and debt covenant ratios, and may even change the way the company looks at capital investment and compensation.

A few clarifications have been issued subsequently via Supplemental Updates: ASU 2014-09, regarding the effective dates of the new standard. The new standards are effective for public entities and some non-profit companies for the first interim period within the annual reporting periods beginning after December 15, 2017. Non-public entities have an additional year, beginning with interim periods within annual reporting periods after December 15, 2018.

The whole intention here is to standardize revenue recognition practices across industries as existing practices fall short when it comes down to how value is delivered to the client based on obligations explicitly or implicitly specified in contracts.

These changes are only a few quarters away. Are you ready?

The core principle in the converged standard requires that an entity recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration in exchange for those goods and services. To accomplish this goal, a five step process has been outlined in the new standard. Every contract with a customer should be analyzed using these five steps to afford accurate reporting.

Five Steps to Revenue Recognition

Five steps to ASC 606 Revenue Recognition

There are specific rules defined for each of these steps. Follow our blog series for a deep dive into each of the five required steps.

Mapping the New Standard to Oracle EBS Projects

The following diagram shows how the five steps shown above map to Oracle e-Business Suite (EBS) Projects. The Purple colored steps need a determination to be made by the business based on the contract. The roles involved in this determination include Finance, Legal, Contract Administration and Project Managers.

An additional step (between the original steps 4 and 5) has been added to the overall process that talks to delivery of services and recording of completion of the performance obligations identified, before final revenue recognition can take place.

ASC 606 Customer Contract Revenue recognition Oracle EBS Projects

Contract Types

In order to better understand each of the steps shown above, let’s take into consideration three types of contracts typical to service delivery organizations:

Service Contracts based on selling hours (Time & Expense-“T&E”): In this scenario the delivery organization contracts to provide a specified number of hours of specialized resources who in turn will deliver to the client’s requirements. There are no specific deliverables listed in the contract. These types of contracts are slowly disappearing as clients demand more specifics before signing contracts.

  • Pure Professional Service Organizations (“PSO”) – Management Consulting

Time & Material (“T&M”) Service Contracts based on specific Deliverables AND Fixed Price Service Contracts based on Milestones: These are very typical service contracts. They are combined together here even though they have completely different billing methods because they will need to be treated the same for revenue recognition purposes under the new standard. Additional contract types like Cost Plus or some variant of this with different types of fees will also fall under this category for Revenue Recognition as long as these contract all specify specific obligations/deliverables on the service provider.

  • PSOs, Engineering, IT Services, Marketing/Advt. Services

Unit Price Based Contracts: Commonly referred to as Schedule of Values (SOV) contracts. These contracts typically specify numbers of units to be delivered for one or more types of items after an initial design/confirmation period.

  • Construction, ATO/ETO based Manufacturing Firms
  • SOV functionality is introduced in release 12.2.5

Our New Revenue Recognition Standards blog series demonstrates how project-centric companies can use Oracle EBS Projects to manage and comply to the new standards with minimum disruption to existing business practices. A case study for each contract type will be used to explain how each step can be interpreted and implemented within Oracle EBS Projects Applications.

Up Next –  Step 1: Identify the Contract with the Customer – Revenue Recognition Standards

Learn more on managing ASC 606 revenue recognition with Oracle EBS Projects-
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Costing Standard Rates vs Actual Rates in Oracle Fusion™

Oracle Fusion Projects Portfolio Management (PPM) will cost labor transactions at a standard rate setup in the rate schedules. The rate could be at the person, job, or resource class level.

Oracle Fusion Payroll will cost labor transactions at an actual rate setup for the employee.

Assumptions that detail the example:

  • Actual salary $100 / pay period + $30 for Benefits
  • Employee charges 50/50 of time to direct/indirect
  • Standard Costing rate 120 & 30% for benefits applied as burden

The Payroll Transactions (Actual Costs)

The payroll transaction will be processed directly into the GL and will not pass through PPM.  There is no way to easily split the transactions across natural accounts for Direct & Indirect charges.  It will only transfer the salary and benefits transactions into separate natural accounts and look like the following:

The Project Portfolio Management Transactions (Standard Rate Costs)

The PPM transactions will also process directly into the GL and will not pass into Payroll.  PPM will split the transactions into Direct & Indirect costs.  If burden schedules are setup correctly, they will also separate the benefits & other overhead costs.

Balance Review When Closing the Period

Based on the above transactions, there are a few balances that need to be reviewed and reconciled at the end of the period.

An entry is needed at the end of the period to adjust the payroll variance and report accurately.  The labor variance measures the difference between the actual and expected cost of labor.

Financial Reporting

Finally, the financial report balances should include the variance account.  The table below shows the balances and will net to the $130 dollars from Payroll in our example:

If the rates are maintained accurately and regularly, the variances should remain small.

If the Labor Variance is favorable, the company paid less than its standard cost for the direct labor it used.

If the Labor Variance is unfavorable, the company paid more than its standard cost for the direct labor it used.

If there is a significant difference in either case, the standard labor rates or the burden rates need to be reviewed and updated.

The Labor Variance accounts along with the indirect labor cost accounts roll up to a summary indirect cost account, which is reported below the line in the P&L to derive net margins.

 

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Increase Cash Flow With Efficient and Accurate Project Billing Using Oracle Project Portfolio Management Cloud

Project billing can be cumbersome for your Finance organization. It can often be very manually intensive, resulting in inefficient project billing practices.

Oracle’s ERP Project Portfolio Management (PPM) Cloud provides simplified, modern tools for comprehensive project financial management. Oracle PPM Cloud allows Finance Teams to monitor time and expense entry and invoice automation using a single dashboard. Oracle PPM Cloud empowers Project Teams to quickly create, adjust, finalize, and submit invoices for approval. Project Managers can easily review invoice accuracy before approving.

Oracle PPM Cloud ensures rapid and accurate project billing and revenue management by allowing project teams to

  • capture all applicable time and expense data for invoicing
  • monitor all processed time and expense in one dashboard
  • ensure clients receive the correct invoices on time
  • implement efficient billing practices with invoice automation

Oracle Project Portfolio Management Cloud can help your organization increase profits, improve cash flow, and achieve greater client satisfaction. Watch the video to learn more:

 Improving Project Billing and Cash Flow in Oracle ERP Cloud

 

Project Partners Oracle ERP Cloud Video Series – highlighting how Oracle ERP Cloud and Project Partners’ Services Resource Planning™ provides your business with the visibility, controls, and tools to attain greater operational and financial performance.

Simple and Accurate Expense Entry in Oracle ERP Cloud
Simple and Accurate Time Entry in Oracle ERP Cloud

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Project Partners Achieves Oracle PartnerNetwork Cloud Standard Partner Designation

Oracle Cloud Standard Partner

The Oracle PartnerNetwork (OPN) Cloud Program has recognized Project Partners for exemplifying expertise, skills, and investment in Oracle Cloud solutions.  As a member of the OPN Cloud Program, our Team has strengthened our innovative portfolio of solutions on the Oracle ERP Cloud, HCM Cloud, and EPM Cloud.

Project Partners commits each day to optimizing business processes and IT investments for global customers using Oracle E-Business Suite and Primavera (P6, Unifier, and Instantis EnterpriseTrack).  Now with our new Cloud Standard Designation, our Team delivers completely integrated ERP Cloud solutions on Oracle’s world-class Cloud platform.

Let our Team help Your Team with your Cloud transformation strategy, planning, and implementation optimization today.  Contact David Duncan (dduncan@projectp.com) now and drive your Oracle investment to greater business value with Project Partners today!


Learn more

Oracle Cloud Resources – white papers, datasheets, webinars, and videos

Accelerated Path to the Oracle Cloud 

Oracle ERP Cloud Video Series