Exclude Uninstalled Materials from the Earned Revenue Calculation

Owned by Kyle Niekamp
07 11, 2018

Issue/Symptom/Question

How do I exclude uninstalled materials from the earned revenue calculation?

Applies To

PENTA for Windows

Finance & Accounting

Revenue Recognition

AIA Stored Materials

Resolution/Fix/Answer

  1. Kick off the revenue recognition process
  2. Using the PENTA Workbench, navigate to the Gross Margin report on the PM: Financial workbench panel to valid earned revenue numbers
  3. Add new columns to the Workbench report for the following:
    1. ‘Adjustment for Uninstalled Materials’
    2. ‘Cost after Adjustments’
    3. ‘Contract after Adjustments’
    4. ‘Adjusted Earned Revenue’
  4. Save the workbench report
  5. Export the Gross Margin report to excel
  6. Identify all projects that have ‘uninstalled materials’ that will impact the revenue calculation
  7. Manually enter the uninstalled material adjustment in this column (as negatives)
  8. In the ‘Cost after Adjustments’ column, add an excel formula to sum the ‘Cost to Date’ and ‘Adjustment for Uninstalled Materials’ columns
  9. In the ‘Contract after Adjustments’ column, add an excel formula to sum the ‘Total Contract’ and ‘Adjustment for Uninstalled Materials’ columns
  10. In the ‘Adjusted Earned Revenue’ column, add an excel formula as follows: 
    1. (‘Cost after Adjustments’ / ’Forecast Cost At Complete’) * (’Contract for Revenue Purposes’)
      This will be the earned revenue calculation including the uninstalled materials adjustments

   11. For each job that has an uninstalled material adjustment, enter a manual revenue recognition entry to override PENTA’s default revenue calculation

    1. Review system option #90 – Recommended process is to have option #90 set to 2 and for each job, set up a manual revenue recognition only cost plus line item. Make the line item # 999999. 

 Cause

Generally Accepted Accounting Principles (GAAP) released a new guidance effective December 15, 2017, which covers the handling of uninstalled materials for revenue recognition purposes. Using the guidelines below, in certain situations, materials will need to be excluded from the earned revenue calculation. The steps below explain the steps to exclude uninstalled materials from the earned revenue calculation.

1.      Guidance for uninstalled materials provides four criteria, that if all met, may indicate a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation and should be excluded from the measure of progress:

     a.      The good is not distinct (could easily be used on other construction projects, i.e. lumber, rebar, etc.)

     b.     The customer is expected to obtain control of the good significantly before receiving services related to the good

     c.      The cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation

     d.      The entity procures the good from a third party and is not significantly involved in designing and manufacturing the goods