This time around, I’m writing about elimination of percentage of completion (POC). This concerns companies with long-term projects and who choose to book the revenue based on the POC. Instead of booking the revenue once when the entire project is finished, revenue is booked gradually as the project progresses based on the share of the incurred cost of the estimated total cost and estimated margin.
When several entities in the group contribute to the project, additional complexities arise when the project work conducted by the group entities occurs in different phases of the project. Also, as it tends to be, one group entity has the contract with the customer and it adds a margin to rest of the entities’ invoicing. These factors trigger the need for a POC elimination in order to adjust the revenue the group is showing on the project. The revenue the group recognises on the project needs to be in line with the POC of the whole project, all group entities’ contributions included.
For the elimination, you need to collect from the group entities at project level:
- Estimated value of the project and costs
- Incurred revenue and costs
If only one of the group entities invoices the customer and the rest of the entities invoice intra-group, the above information needs to be split to third party and intra-group. The intra-group revenue, cost, receivable and payable are eliminated in the consolidation process.
At the top of the organisation hierarchy, the whole group’s POC is calculated based on the estimated and incurred cost. The revenue the group has reported on the project is adjusted accordingly.
The challenges in bringing the POC elimination about usually lie in identifying the projects in a unified manner throughout the group, and being able to report the requested data on sometimes high number of projects. Additionally, if the value chains within the group get long, the all units might not even know they are supplying to a project. This can be solved by concentrating only on the most significant entities.
Because of its nature, the POC elimination draws a lot of management attention. It reduces revenues which trickles down the income statement. The counter booking is made into the balance sheet on Billings in the excess of revenue. Building the POC elimination into a system makes the data collection and consolidation sounder and offers the benefits of traceability and auditability which helps in dealing with the management attention.
If you need help with your group consolidation and elimination, don’t hesitate to contact me or my inlumi colleagues near you.