Vendor Prepayments and Revenue Recognition For Fixed Price projects in Dynamics 365 For Operations

Vendor Prepayments and Revenue Recognition For Fixed Price projects in Dynamics 365 For Operations

Hello, Good to be back here on the blog !!! Jumping straight into topic here today about a new addition of a feature for vendor prepayments in relation with fixed price project revenue recognition !!

Issuing large amounts of prepayments to vendors is often a common business requirement for large scale, long term fixed price projects, which involves a lot of sub-contracted work. Vendors often request prepayments for the subcontracting services they are contracted to deliver for these projects. These prepayments can sometimes be just a flat amount based on mutual decisions, or it can sometimes be a percentage of the total cost of the subcontracting service. There can be several months of gap between when the prepayments are issued and when the vendors actually delivers the services.

For such projects, customers usually recognize revenue on a percentage completion basis and need the ability to include these vendor prepayments in the project percentage completion calculation of the project for revenue recognition/revenue estimates calculations.

In this post, we will evaluate one of the new features of Dynamics 365 For Operations (Referred as D365 – Operations from here on), which allows to consider these vendor prepayments automatically when running the monthly revenue recognition/estimates for fixed price projects for calculating the % completion of the project.

For this demonstration, I have setup a fixed price project and the associated contract already. This project is setup to recognize revenue on a % completion basis.

Contract Setup

Project Setup

The Project Manager has created and submitted the purchase requisition for approval, so that the services can be procured from Rebar Supply Co. Ltd. See screenshot below.

PR Submitted

The purchase requisition gets approved by the designated manager and the Purchase order is automatically crated. See screenshot below.

PR Approved

The Project procurement team/Project manager then sets up the prepayment details on the project purchase order that was automatically created upon approval of the requisition.

PrepaySetupOnPO

Finance and Accounting team now processes the prepayment invoice to initiate the prepayment to the vendor.

Prepay Invoice

Prepayment

Now that the finance team has processed the vendor prepayment for the subcontracting work, let us now go ahead and see what happens when they run the monthly revenue recognition process for this project.

Notice that system was able to consider the vendor prepayment cost for the project and was able to determine the percentage completion based on the total project budget/forecast defined. See screenshot below

PComp

When this revenue recognition entry is posted, the revenue amount (based on Percentage complete and the total contract value) will be posted to general ledger. We all know how it works from here 🙂

That’s it for today !!

Sandeep Chaudhury **

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Ledger Postings Management of Fixed Price projects in Microsoft Dynamics Ax 2012 – Scenario I

Friends,

Hope all is well your way. I Did not get chance to spend time on my blog this month.

We keep hearing a lot of questions on the ledger posting scenarios, revenue recognition etc in case of fixed price projects in Microsoft dynamics AX. Well,I thought, I will explain the various ledger posting scenarios in the life cycle a fixed price project in few of my subsequent posts.

The ledger postings in case of a fixed price project is controlled through the setup done in the Project groups. Based on the these setups, the ledger posting in a FP project can happen in 8 different ways.

We will analyze each one of the setup options one by one and verify the ledger postings. I will name these 8 ways of ledger posting as Scenario 1 to 8. We will analyze the scenario 1 in today’s post.

The 3 parameters in the project groups form which controls these ledger posting are as follows.

  • On-account invoicing.
  • Revenue recognition accounting rule.
  • Matching principle.

Scenario 1 :

On-account invoicing Balance
Revenue recognition rule Completed percentage
Matching principle Sales value

Refer to screenshot below for the new project group which I have created.

Project Group Setup

I have created a new cost template and a fixed price project and attached this to the a new project group with above setup.

Take an example where a company owns a fixed bid contract of $500000 and agreed upon with the customer for a milestone based invoicing plan as depicted below screenshot.

On-account invoice schedule

Costs are incurred in the project during its progress as indicated in the table below. We will post Estimates for the project at the end of every month and eliminate it in the month of SEP.

Month Cost in project
APR $20,000
MAY $25,000
JUN $40,000
JUL $30,000
AUG $55,000
Total Cost $170,000

Take a look at the tables below which shows the P&L and WIP statistics in the Project at each month before and after the estimates are posted.

I am not able to provide the AX screenshots here as I have some issues in my AX environment.

Project Profit & Loss Statement before posting estimates:

Account Dr/Cr APR MAY JUN JUL AUG SEP TOTAL
Accrued revenue – sales value Credit 0 0 0 0 0 0 0
Revenue 0 0 0 0 0 0 0
Cost Debit $20,000 $25,000 $40,000 $30,000 $55,000 0 $170,000
Gross Margin -20,000 -25,000 -40,000 -30,000 -55,000 0 -170000

Project WIP Statement before posting estimates:

Account Dr/Cr APR MAY JUN JUL AUG SEP TOTAL
WIP– sales value Debit 0 0 0 0 0 0 0
Gross WIP 0 0 0 0 0 0 0
WIP invoiced on account Credit $250,000 0 $200,000 $50,000 0 $500,000
Net WIP -250000 -200000 -50000 0 -500000

Note : The project on account invoices appear in the WIP-invoiced On account ledger.

Project Profit & Loss Statement after posting estimates:

Account Dr/Cr APR MAY JUN JUL AUG SEP TOTAL
Accrued revenue – sales value Credit $58,800 $73,500 $117647 $88,236 $161765 0 ~500000
Revenue $58,800 $73,500 $117647 $88,236 $161765 0 ~500000
Cost Debit $20,000 $25,000 $40,000 $30,000 $55,000 0 $170,000
Gross Margin $38,800 $48,500 $77,647 $58,236 $106765 $1,70,052

The values for the accrued revenue are calculated based on the % complete/ Degree of completion in the project as the setup is done to be “Completed Percentage” rule.

You may notice rounding issues in the values above as I have taken random examples.

Project WIP Statement after posting estimates:

Account Dr/Cr APR MAY JUN JUL AUG SEP TOTAL
WIP – sales value Debit $58,800 $73,500 $117647 $88,236 $161765 -500000 0
Gross WIP $58,800 $73,500 $117647 $88,236 $161765 0 ~500000
WIP invoiced on account Credit $250,000 0 $200,000 $50,000 -500000
Net WIP -191200 -73,500 -82,353 -88,236 -111765 0 0

I hope my explanation of this scenario of posting in the fixed price project was clear. Please post your queries if any pertaining to this.

Till next time !!!!

Thanks

Keep DAXING Smile