Hello. I am hoping someone can advise or give some direction on how to handle this situation in IFS.
Parent company received an order. Billing for the order will be done by parent and depends on milestones achieved. Parent sets up the customer order.
Most of the work will be done by subsidiary.
Part of the revenue will be earned by parent. The rest of the revenue will be earned by the subsidiary.
Subsidiary sets up an intercompany order (customer is parent) and project.
The amount of revenue to be recognized by parent each month depends on the percentage of completion of the project in the subsidiary.
Parent will not recognize cost.
Subsidiary recognizes revenue each month based on percentage of completion. Cost recognized is actual cost.
After subsidiary completes project, it ships to the customer. It will then bill the parent.
For example,
Assume the parent received a $100 order.
Parent sets up customer order for $100.
Revenue allocated to parent is $20. Revenue allocated to subsidiary is $80.
Subsidiary’s planned cost is $50.
Subsidiary sets up an intercompany customer order and also sets up a project.
In month 1, subsidiary’s cost is $10, so percentage of completion is 10/50 = 20%. Therefore, revenue recognized is 20% * 80 = $16.
In month 1, parent recognizes revenue of 20% * 20 = $4 . No cost is recognized.
In subsequent months, the subsidiary recognizes actual cost and revenue based on percentage of completion. The parent recognizes zero cost and revenue based on the subsidiary’s percentage of completion
Our subsidiary normally sets up an order and project. A financial project is also set up with project type Capitalize Rev/Exp and POC Income first. So whatever the subsidiary needs to do it does correctly. Out problem is the parent’s side of the above situation. There is an order and no project. Yet we would like revenue to be recognized somehow based on the percentage of completion of the subsidiary project. Is this at all possible, or is there some other setup that would mimic this? At the moment we are recognizing the parent’s revenue via journal entries, which is not ideal. We are on Apps 9 Update 13.
I would appreciate any thoughts and ideas.
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Dear Andrei,
Thank you for sharing your situation. It seems like we're encountering a similar scenario, albeit with a slightly different accounting principle in place.
In our setup, the parent company recognizes costs based on the revenue recognized by the subsidiary on a Percentage of Completion (POC) basis. This means that as the subsidiary progresses through the project and recognizes revenue based on completion, the parent company's costs and revenue is also recognized accordingly.
Inter-company costs and revenue are then reconciled and eliminated during the consolidation process. This approach ensures alignment between the parent and subsidiary's financial reporting while accurately reflecting the progress of the project.
Here’s an example of an income statement before and after eliminations.
Considering your setup, it might be beneficial to explore implementing a similar approach where the parent's revenue recognition and cost recognition are tied to the subsidiary's percentage of completion. This could potentially streamline your financial reporting process and ensure correct income statement and balance sheet eliminations in the consolidation process.
Although not related to IFS, I hope this insight proves helpful. Feel free to message me if you have any further questions.
Best regards, Lauri
Hi,
I believe you need corresponding project in parent, with budgeted parent margin and manual progress indication (as mentioned in the other topic you have created)
Dear Andrei,
Thank you for sharing your situation. It seems like we're encountering a similar scenario, albeit with a slightly different accounting principle in place.
In our setup, the parent company recognizes costs based on the revenue recognized by the subsidiary on a Percentage of Completion (POC) basis. This means that as the subsidiary progresses through the project and recognizes revenue based on completion, the parent company's costs and revenue is also recognized accordingly.
Inter-company costs and revenue are then reconciled and eliminated during the consolidation process. This approach ensures alignment between the parent and subsidiary's financial reporting while accurately reflecting the progress of the project.
Here’s an example of an income statement before and after eliminations.
Considering your setup, it might be beneficial to explore implementing a similar approach where the parent's revenue recognition and cost recognition are tied to the subsidiary's percentage of completion. This could potentially streamline your financial reporting process and ensure correct income statement and balance sheet eliminations in the consolidation process.
Although not related to IFS, I hope this insight proves helpful. Feel free to message me if you have any further questions.
Best regards, Lauri
Hello Lauri
Thank you for your reply. So in your example, the sub’s actual cost will determine its revenue (based on its POC). And for the parent, its cost will be the sub’s cost, and the revenue will then be whatever it has to be to match the POC of the sub. Am I understanding that correctly?
In your setup, does the parent also have a project?
Yes, parent must have its own project.
For the parent, its cost should be the sub’s REVENUE (internal invoicing), and the revenue will then be whatever it has to be to match the POC given by the sub.
Hi @andrei.borromeo,
I'm glad my previous message provided some clarity. Yes, you've understood the setup correctly and @Adam Bereda concurred with it. In this scenario, the subsidiary's actual cost indeed determines its revenue based on its Percentage of Completion (POC). As for the parent project, it does indeed have its own project.
For the parent project, its cost is essentially the cumulative cost of all its subsidiaries, and the revenue will be adjusted accordingly to align with the POC of the subsidiary projects. In essence, both the subsidiary and parent projects undergo the process of collecting transactions and running capitalization and revenue regulation, ensuring consistency and accuracy across the entire project portfolio.
Let me know if you need further clarification on any aspect of this setup.
Best regards, Lauri
Hi @Lauri and @Adam.Bereda , thanks for your replies. We are now strongly considering implementing your suggestion/approach.
Is it possible to set it up so that each month or period, IFS automatically incurs the correct cost (ie. same cost as Sub) and revenue (ie. based on the POC of the Sub) ? So that afterwards, capitalization and revenue recognition can be run.
Our normal settings for POC projects are like so. Is there something we should be doing differently so that it mimics your approach?
Thank you.
Hi @andrei.borromeo,
It's great to hear that you're considering implementing the suggestions provided. Regarding your queries:
A feature that automates inter-company revenue recognition so that the POC revenue of the supply company is posted automatically as cost in the customer company would be very valuable indeed.
It would ensure timely and consistent recognition of revenue and cost across the related entities and provide an audit trail of the inter-company transactions.
Unfortunately, IFS lacks a built-in solution for this process, even the latest version of IFS Cloud, and I am not aware of any future development activities that would address this demand.
In our current process, manual voucher entry is made at each month-end at the customer company to recognize cost and liability. The manual voucher is created right after the supply company has finalized its POC revenue recognition. We are using Periodical posting method to help the synchronization.
The screenshot you provided shows you are using transactional posting method, but it should work as well. You just need to collect the POC revenue information and put it to a voucher at a given moment during the month-end closing.
Hope this reply helps you forward and IFS takes a note of the demand for automated method to recognize inter-company POC revenue/costs, as we are likely not the only customers with a demand for it.
Best regards, Lauri
Thank you @Lauri . I had the same thoughts about the manual voucher. Thank you for confirming. Your advise has been very helpful, much thanks!
@Lauri , for intercompany eliminations, do you have a separate elimination entity used solely for elimination entries?
