Wednesday, February 25, 2015

Results Analysis - Completed Contract Method (CCM)

Results analysis (RA) was developed for companies with long-term projects/orders. Normally projects/orders are regarded as long-term if it takes more than one year to complete.  For controlling requirements or for balance sheet purposes (refer to accounting principles), such objects need to be valuated at regular intervals (normally monthly).  With large quantities of objects, for mid-year statements, or for the requirements of Controlling, however, results analysis for objects with shorter life cycles may be required.
     For long-term projects the actual postings recorded in FI may not necessarily reflect the current valuation and progress of the project.  If revenue is billed in advance of actual job progress, the profit can be overstated for a period.  Conversely, if progress has been recorded for a project in advance of billing, the profit can be understated for the period.  The purpose behind RA is to analyze the project and calculate revenues and costs. Any differences between calculated results and the postings previously reported in FI can be posted automatically.
     Result Analysis can generate FI-GL postings for the object (ex.: project) only when this object is settled.  Therefore the condition to generate FI postings for the object is the object settlement.  System also updates CO/PS with a special value types available in the CO/PS info system that has no precondition (such as settlement) in order to be calculated.
RA_01.png

      The RA data is stored in the system by period; therefore it is not possible to have RA postings more than once in the same month.  The RA simulation can be done at any time, but only saved data is the basis for respective postings.
     The Result Analysis is performed at the object (ex.: billing WBS-element) level, and not at the customer level.  This is also reflected by the fact that respective FI postings are not generated at customer account level.  Therefore the multi-customer projects are valuated at totals level, disregarding the revenue flows from different customers unless this is reflected by the project structure.

There are 3 major types of projects that can be classified from the accounting (and business) perspective:
1. CAPEX (can be also CAPEX/OPEX mix)
2. OPEX
3. Customer Projects (Services, Make to Order, or whatever that involves revenue postings)

The Completed Contract Method (CCM) is probably one of the most simple (and easy to understand for non-accounting person) methods for Result Analysis.
This method applies to Customer Projects (or Revenue based projects).

With the Completed Contract Method, the costs and revenues affecting the net income are calculated as follows:

The object does not have the status X
Costs affecting net income = 0
Revenue affecting net income = 0
and therefore
Capitalized Costs (WIP) = Cumulative Actual Costs
Revenue Surplus (Deferred Revenue) = Cumulative Actual Revenues

The object has the status X
Costs Affecting Net Income = Cumulative Actual Costs
Revenue Affecting Net Income = Cumulative Actual Revenue
and
Capitalized Costs (WIP) = 0
Revenue Surplus (Deferred Revenue) = 0

Other words the revenue is recognized only upon completion of the project (complete contract).
            Status X is usually the status Final Billing or Technically Completed. But it can be any other status also.  The quantity-based POC method is represented by results analysis method 09 or results analysis type E with profit indicator C.
RA_02.png
Or in the expert view:
RA_03.png
For the CCM method the planned data is not relevant for the RA calculation, but only object's system status and actual postings.

Below I present the following posting example to illustrate the logic of this method:
RA_04.png
1. January 2014: IT equipment (from stock) and Salary cost is posted to Project Expenses 70,000
2. 31/01/2014: RA calculates WIP as 70,000; Unbilled Revenue is not calculated
3. February 2014: Invoicing the customer for 90,000; no expenses for the period
4. 28/02/2014: RA calculates Deferred Revenue (Billed Revenue in Excess of Recognized Revenue) 90,000
5. March 2014: Change the project status to TECO (interpreted as Contract Completed)
6. 31/03/2014: RA posting: Clear WIP, Clear Deferred revenue.
The example of FI posting keys for Result Analysis corresponding to the above:


RA Category
Description
P&L Account
BS Account
WIPR
Work in Process
WIP Change
WIP from which Revenue can be generated
(Requirement to capitalize)
Account
POCS
Revenue surplus
Deferred Revenue
Deferred Revenue
(Deferred revenue)
Change Account

 

      
     For simplicity purpose I will not distinguish between different WIP categories such as Requirement to Capitalize WIPR, Optional to Capitalize WIPO, Not to be capitalized WIPP.  The RA can calculate these 3 WIP categories that also can be used.