1. Introduction and Objectives
Because contracts span multiple accounting years, matching revenue and expenditures to the correct fiscal period is critical. This lesson details the compliance standards mandated globally by ASC 606 (USA) and IFRS 15 (Europe) for revenue recognition on contracts performed over time.
 
2. Performance Obligations Satisfied Over Time
Under modern global standards, contract revenue is recognized over time if the project creates an asset with no alternative use to the builder and the company has an enforceable right to payment for performance completed to date. 
 
3. Input vs. Output Measurement Methods
To determine how much revenue to recognize in a given fiscal year, companies must calculate the project’s Percentage of Completion:
  • The Cost-to-Cost (Input) Method: Measures progress by comparing actual contract costs incurred to date against the total estimated budget for the entire project.

    Percentage of Completion = Actual Contract Costs Incurred to Date / Total Estimated Budgeted Costs for Contract
  • The Surveys of Performance (Output) Method: Measures progress based on physical milestones reached, verified by an independent structural architect or engineer who issues a formal progress certificate.

    Percentage of Completion = Value of Work Certified / Total Contract Sale Price

4. Core Revenue Calculation Architecture
Once the percentage of completion is established, revenue and gross profit are recognized on the income statement using the following formulas:

  • Revenue to Recognize (Current Period) = (Total Contract Price × % Complete) − Revenue Recognized in Prior Periods

    Cost to Recognize (Current Period) = (Total Estimated Budget Costs × % Complete) − Costs Recognized in Prior Periods

PreviousNext