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Part 2 of 2
LEVERAGING ORACLE PROJECTS TO MANAGE PERFORMANCE BASED REVENUE

As stated previously, the core principle in the new Standard requires that an entity recognize revenue to depict the transfer of goods or services to a customer in an amount that reflects the consideration given in exchange for those goods or services.

Impact to Balance Sheet and Income Statement

When a contract is signed, an asset and a liability are created for the total amount of goods and services promised to the customer.

Upon fulfillment of an identifiable performance obligation (commonly referred to as a “deliverable”), the liability is reduced, and revenue is recognized when that performance obligation is satisfied and accepted by the customer.

When payment is received for the goods and services provided, the asset is reduced.

This new methodology differs from the previous generally accepted practice of recognizing revenue when the customer is billed, and a receivable is created.  No longer will a company track unbilled revenue streams.  Oracle Projects provides the ability to configure your projects to meet the requirements of Step 5 of the new ASC 606 guideline with standard functionality.

Step 5 of the Standard requires a two-step approach.   Using Oracle Projects, work is performed, and delivery is recorded.  Then, a process to Generate Draft Revenue for the projects is run to complete the recognition process.

The following is an example of how your company can leverage Oracle Projects to meet ASC 606 compliance.

Service Contracts based on selling hours (T&E)

  • Work Based Revenue Recognition
    • Standard Oracle functionality of Time & Expense Billing
    • Set up project and billing information

  • Identify the Performance Obligations and set up as Budget Lines for the contracted number of hours

  • Delivery Team Charges Time & Expenses to the Project

  1. Revenue based on hours charged
  2. Acceptance of work performed implicit when customer signs timecard
  3. Invoicing takes place when the timecard is approved. This process can precede the actual recognition of revenue as the performance obligation is not yet complete.
  4. As each phase of the project is finished, revenue is recognized.

Run the Generate Draft Revenue Process for your projects to recognize revenue

Perform Work and Record Delivery

  • T&M Service Contracts based on specific Deliverables
  • Fixed Price Service Contracts based on Milestones
    • Mark Deliverable as Complete. Mark Billing Action as Complete

Run the Generate Draft Revenue Process for your projects to recognize revenue:

T&M/Fixed Price Service Contracts

  • A Fixed Price Service Contract requires the use of Billing Events generated from deliverables to generate revenue.
  • Invoicing can be generated per the terms of the contract; however, revenue cannot be recognized until the performance obligation has been met.

Unit Price Based Contracts

Oracle Planning and Control offers the ability to utilize a structure called Schedule of Values (“SOV”).  The SOV allocates value for various parts of the work from a contractual agreement.  The SOV schedule is also used as the basis for monitoring progress, tracking deliverables, and submitting and reviewing payment certificates for billing the client.  The user can either enter a contract in Oracle Project Contracts, or directly enter one.  Once a project is created, it can be updated from Oracle Project Contracts or directly entered in Oracle Planning and Control.

  • Enter Progress and record quantity completed for each SOV Task
  • In this case, a task has been set up for each performance obligation under the contract. As the task is completed and accepted, revenue can be taken

  • Billing Events are generated from Schedule Of Values progress and are used to generate revenue

Recent Enhancements to Support ASC 606

Oracle has been supporting organizations implementing these changes in their business to accommodate the new Standard.  To aid in the implementation and management of project revenue according to the new accounting standards, new consolidated patch sets to Oracle Projects have been released.

For companies using Oracle EBS Projects Suite Release 12.1.3 and above and Release 12.2.7 and above, Oracle has issued a patch set specific to each release to support management of project revenue according to ASC 606.

Below you will find screen shots of some of the new standard functionality available with these changes, recently published by Oracle.  As you can see, Oracle Projects addresses set up, tracking and revenue recognition via the use of a new Structure for Performance Obligations.

The new processes allow for the user to enable the use of Performance Obligation, create said obligations, publish and track progress against the performance obligation and generate revenue in accordance with the new standards.

As you can see Oracle Projects provides the ability to configure your projects to meet the requirements of the new ASC 606 guideline with standard functionality.

Oracle Licensing Requirements

  • Project Costing and Billing are required for all features discussed in this paper
  • Project Planning and Control (formerly known as Project Management) must be implemented to leverage Deliverable functionality
  • Schedule of Values functions are available in Oracle Project Planning and Control release 12.2.5
  • Application of Patch sets as described in this paper to take advantage of the ability to record and track Performance Obligations

CONTRACT MODIFICATIONS

Contract modifications, commonly referred to as change orders or amendments, occur when the price or scope of a contract is changed.  Depending on the circumstances, these changes are accounted for either as a modification to an existing contract, or as a separate contract.  Proper accounting treatment for modifications differs based upon this determination.

There are three steps to determine the proper treatment for a contract modification.

Determine Whether the Change Qualifies as a Contract Modification – A contract modification is any change to an enforceable rights and obligations of the parties to the original contract.  The Standards defines this as a change in scope and/or price of the original contract.  It does not need to be written, it can also be oral or implied through customary business practices.  Once an entity determines that a change is indeed a contract modification, it determines whether to account for it as a change to the original contract or as a separate contract.

Determine Whether the Modification is a Separate Contract – To determine that a modification is a separate contract, these two criteria must be met.

  1. The scope of the contract has increased with the addition of distinct goods or services, and
  2. The price of the contract increased by an amount comparable to the entities standalone selling price of the additional goods or services. (Selling price less ordinary selling costs)

Determine the Proper Accounting Treatment for Contract Modifications – If a contract modification is considered a separate contract, no changes to the existing revenue on the original contract are required.  The new contract is recognized as the performance obligations in the new, separate contract are met.  However, if the contract modification is not considered separate, then the modification is combined with the original contract.  There are two methods defined in the Standard for proper revenue recognition of a combined contract modification.

  • Prospective Treatment

If the remaining goods/services are distinct from those of the original contract and do not meet the criteria for a separate contract, the entity treats the original contract as terminated and accounts for both the original contract and modifications together as a newly created contract (ASC 606-10-25-13).

Revenue already recognized on the original contract is not adjusted.  All remaining transactions are accounted for on a prospective basis.

  • Cumulative Catch-up Adjustment

If the remaining goods/services are not distinct, the entity combines the increase or decrease of goods or services with the original contract’s promised goods/services to create a single performance obligation that is partially completed at the date of the modification.  The entity must adjust previously recognized revenue to reflect the changes of the modification to the transaction price.

USING ORACLE PROJECTS TO MEET THE OBJECTIVES OF CONTRACT MODIFICATIONS AS DEFINED
IN ASC 606

Begin by increasing the amount of the Agreement on the project, then adding an additional funding line for the increased contract amount to the project tasks.

If the contract modification is Prospective, the Date Allocated should reflect the date from which revenue recognition will occur.

Create a Revenue Event using the new Date Allocated and run revenue generation processes.  The new revenue amount will begin as of the new date as indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If the contract modification is cumulative, the Additional funding should be entered with the original Allocated Date.  When a new Revenue Event is created, use an event date that is retroactive to the original date.

 

The new revenue will “catch-up” in the currently open accounting period upon generation.

 

 

 

 

MANAGING PERFORMANCE BASED REVENUE RECOGNITION

Accounting Standards Codification (ASC) 606

-CURRENT UPDATES-

This paper provides an update to one of our previous six-part blog series “Are you Ready for the New Revenue Recognition Standards?”

It outlined the May 28, 2014 announcement that the FASB and IASB jointly issued ASC 606, Revenue from Contracts with Customers.  The intention around this change was 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.

IN THIS LATEST SERIES, WE WILL RECAP AND HIGHLIGHT THE MOST CURRENT CHANGES SINCE THE DEADLINES FOR COMPLIANCE HAS PASSED.

On May 28, 2014, FASB and IASB jointly issued ASC 606, Revenue from Contracts with Customers.  Due to inconsistencies in revenue recognition among industries, and the disconnect between U. S. GAAP and IFRS reporting, the Boards collaborated to reduce or eliminate those inconsistencies and thereby improve comparability between domestic and international best practices.  The resulting standards will therefore significantly affect the 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.  The new standards are poised to change budgets, contract negotiations and current business practices.

Industry-Neutral Revenue Recognition

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.

Step 1 – Identify the Contract with the Customer – A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations.  The guidance applies to all contracts that meet specific criteria as defined within the standard.

Step 2 – Identify the Performance Obligations in the Contract – Performance obligations are promises to deliver certain goods and services to a customer.

Step 3 – Determine the Transaction Price – The transaction price is the amount an entity is expected to receive in exchange for transferring goods and services to a customer.

Step 4 – Allocate the Transaction Price – The relative standalone transaction price of each good or service being transferred to a customer, including discounts and other variable amounts of consideration.

Step 5 – Recognize Revenue as Performance Obligations are Satisfied – This step happens when the goods or services are transferred to the customer.  The customer will have taken control of the goods or services at this time.  The amount of revenue that is recognized is the amount allocated to satisfy a performance obligation.

HOW CAN WE HELP YOU SUCCESSFULLY NAVIGATE THROUGH THESE CHANGES?

Project Partners will demonstrate how project-centric companies, using Oracle Projects and/or Oracle Project Contracts, can comply to the new standards with minimum disruption to existing business practices.  View 5-Step recap below.

ASC 606:  REVENUE FROM CONTRACTS WITH CUSTOMERS

PART 1

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.

STEP 1   IDENTIFY THE CONTRACT WITH A CUSTOMER

The new revenue guidance defines a contract as an agreement between two or more parties that creates enforceable rights and obligations.  Essentially, all parties to the contract have to approve the agreement, are committed to fulfilling their obligations, and have Identifiable rights.  The contract must have commercial substance and collectability is probable.

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.

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.

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.

STEP 4   ALLOCATE THE TRANSACTION PRICE

Allocation of 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, just as-long-as that estimation is an accurate representation of what price would be charged in separate transactions.

STEP 5   DELIVER SERVICES AND RECORD OUTCOME

The last step in the new revenue recognition standard is to recognize revenue when or as the performance obligations in the contract are completed.  A performance obligation is completed when or as control of the good or service is transferred to a customer.  The Standard defines control as “the ability to direct the use of and obtain substantially all of the remaining benefits from the asset.” (ASC 606-10-20).

The Standard allows for revenue recognition based upon two methods for measuring progress, Output and Input.

Outputs are the result of inputs and processes   of a business and are goods or services finished and transferred to the customer.  The output method measures results achieved.  Surveys, appraisals, milestones reached, and units produced or delivered are all examples of output methods.  Value to the customer is the objective measure of an entity’s performance.

Examples of an output method would include the number of feet of pipe used for a specific distribution project, or the number of electrical poles used from a transmission plant, to a final destination.

The input method is a more indirect measure of satisfying a performance obligation.  Inputs are measured by determining the amount of effort put into completing the contract.  The input method is implemented by estimating the inputs required to satisfy a performance obligation, and then comparing the effort expended to date against that estimate.

Examples of input methods would be cost-to-cost, labor hours, or material quantities.

The Board decided that, at least conceptually, an output measure is the best depiction of the entity’s performance because it directly measures the value transferred to the customer.  Although the Boards did not state that the output method is the preferred method, they felt that in most cases it is the most appropriate method that is consistent with recognizing revenue as value is transferred to the customer.  A drawback to this method is that there may not always be a directly observable output to reliably measure progress.

 

CLICK HERE for a more in-depth discussion of this topic and read full posts to the ASC 606 Series on our website.

CONTINUE TO NEXT POST 2 OF 2…

“Let’s take another in-depth look at how to use Oracle to comply with the newest revenue recognition rules”  

 

www.projectp.com | Phone: +1.650.712.6200

 

 

 

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.

 

Questions? Contact us!

Project Partners has the experience to help you achieve the full potential of your Oracle Fusion Applications.

Visit our resource library for more Oracle insights

By Wendy Lamar

Pay when paid functionality has been added to Oracle E-Business Suite as part of integration with procurement. The pay when paid functionality improves cash flow management by preventing payment to subcontractors until the customer invoice has been collected. Further, the supplier workbench provides the Project Manager improved visibility to the vendor invoice information, as well as enabling the management of invoice holds directly from the workbench. Read the rest of this entry »

By Wendy Lamar

Oracle E-Business Suite (EBS) Release 12.2 includes new functionality that provides a more accurate view of your project labor costs, and expedites customer billing and revenue recognition.

Release 12.2 allows companies to integrate their payroll – Oracle or Third Party – to apply actual labor costs to labor transactions, resulting in a more accurate view of your project labor costs. This also allows the use of actual costs for calculating your burden costs when applicable. Additionally, Oracle added functionality to allow for accrual of the labor costs using either standard accrual rates or HR rate matrices to accrue this cost for reporting, expedited customer billing and revenue recognition, and/or accounting entry recognition in general ledger. Read the rest of this entry »

By Neeraj Garg

This is the third of three articles discussing new enhancements in Oracle E-Business Suite Projects Applications Release 12.2. In this article we address the third of three key enhancements: Costing Using Payroll Actuals

Costing Using Payroll Actuals

This enhancement enables companies to use actual payroll costs from Oracle Payroll or a third-party payroll system to cost project labor transactions. These actual costs are distributed to the labor transactions on projects using new mapping rules that specify the expenditure type, cost type and distribution rules to be used for this purpose. Figure 1 shows an example of this mapping.

Payroll Actuals Figure 1

Figure 1


 

Drawing on this mapping and the amounts retrieved from the payroll system, the costing process will distribute payroll costs to various labor transactions, as illustrated in Figure 2.

Payroll Actuals Figure 2

Figure 2


 

The resulting distributed costs are shown in Figure 3.

Payroll Actuals Figure 3

Figure 3


 

Users also have the choice of accruing standard labor costs prior to a payroll run in order to report project costs and support billing. When payroll costs are distributed, the accrued costs are automatically reversed. In addition, a new process has been introduced in the solution to support payroll roll-backs needed for error correction. This process will reverse out an existing labor distribution to projects, making all the transactions re-eligible for costing. Then, when the new payroll run is completed, these transactions can be costed with the corrected payroll numbers. This process may also be used to correct errors in the setup of labor costing in Oracle Projects. For example, it can be used to reverse out a standard costing run and replace it with an actual costing run.

As with the Costing Using HR rates method described above, companies implementing this feature need consider the need for labor-cost information security, because actual labor costs may be exposed.

Conclusion

With this recent set of enhancements, Oracle E-Business Suite Projects has evolved into a more complete solution that can be used to address nearly any costing requirements that companies may have. Oracle users can more easily take advantage of various approaches to labor costing, using payroll data, HR rates and total time. These enhancements allow companies to manage and perform costing in ways that fit their specific needs, which in turn helps create a better understanding of project costs and, ultimately, profitability.

If you have questions about the new costing enhancements, the use of costing extensions, or any other issues pertaining to using Oracle Applications in an project-intensive environment, contact us! We are always very happy to help end-users make the best use of the applications that we at Project Partners originally invented.

By Neeraj Garg

Continuing from last week’s blog article, new enhancements in Oracle E-Business Suite Projects Applications Release 12.2 allow companies to address various project costing requirements without the use of extensions. There are three key enhancements:

  1. Total Time Costing
  2. Costing Using HR Rates, and
  3. Costing Using Payroll Actuals.

 

Total Time Costing

This enhancement addresses the need to cost labor transactions using effective rates, and especially to encompass exempt employees who do not get paid for overtime work. Like Standard Costing, this enhancement works with standard rates. However, it computes an effective rate for costing labor transactions based on total time charged for a period and the base hours for that period.

There are three new setup elements that are needed to enable Total Time Costing:

  1. Effective period (typically, this will be “weekly”)
  2. Base hours
  3. Enabling Total Time Accounting – new Costing Method for Labor Costing

With these three elements enabled, the effective rate used for costing labor transactions is now computed using the following three-step formula:

                 I.          Base Hours/Charged Hours * Derived Rate = Effective Rate
                II.          Effective Rate * Charged Hours = Raw Cost (Labor)
               III.          Labor Raw Cost * (1 + Burden Multiplier) = Total Burdened Cost (Labor)

In addition, if Total Time Costing is enabled and a new or adjusted transaction is introduced for a person for a previously costed period, the solution does not re-cost all transactions in that previous period. That is, it leaves them at the old rate rather than applying the new rate that was derived using the new total charged hours.

Overall, this enhancement allows users to accurately cost labor for exempt employees. It also allows organizations to meets federal contracting rules for exempt employees, as spelled out in the DCAA Contract Audit Manual, Section 9.

Costing Using HR Rates

This enhancement enables organizations that hold employee rate information in Oracle HR to directly use these rates for project labor costing. This feature is enabled by setting Rate Source in Oracle Projects to “HR” in the costing rule allocation. Rates are then retrieved from the Oracle HR rate matrix using “Rate by Criteria.”

There are many standard criteria available for setting up matrix rates in Oracle HR. Users can also add custom criteria to the rate matrix; these criteria can even call for rates at the project and task levels, if that degree of granularity is needed. Typically, the most commonly used criteria in a matrix are “job,” “location,” and “work type.” A new Project Timecard Template in Oracle Time and Labor has been seeded with these three attributes.

HR rates may also be enabled for use in planning when companies need to compute labor costs in budgets and forecasts.

This enhancement can also play a role in compliance. For example, many companies will benefit from the fact that it enables support for the Davis-Bacon Act in the U.S., which requires companies to pay minimum prevailing wage rates for construction work done at a given location. Also, because the HR rates used in calculations are the actual rates paid to employees, it is very important that labor-cost information security be carefully considered and implemented prior to enabling this enhancement.

In the next blog article we will discuss Costing using Payroll Actuals.