Int. Acc. FA LECT 2&3: other revenue recognition issues part 7…
Int. Acc. FA LECT 2&3: other revenue recognition issues part 7
: how to deal with long-term contracts?
Example of revenue recognition over time, instead of at “point of sale”.
§ E.g., building Rotterdam Centraal took over 10 years.
Long-term contracts often allow the seller to bill a
purchaser at intervals.
Recognize revenue if at least one of the following hold:
Company’s performance does not create an asset with an alternative use.
In addition to 2
., at least one of the following criteria must be met:
a. The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs.
b. Another company would not need to substantially re- perform the work the company has completed to date if that other company were to fulfill the remaining obligation to the customer.
c. The company has a right to payment for its performance completed to date, and it expects to fulfill the contract as promised.
Company’s performance creates or enhances an asset (e.g., work in process) that the customer controls as the asset is created or enhanced;
LONG-TERM CONSTRUCTION CONTRACTS
If criteria are not met, the company recognizes revenues and gross profit when the contract is completed, referred to as the
cost-recovery (zero-profit) method.
Biggest difference: recognition of gross profit.
If criterion 1 or 2 is met, then a company recognizes revenue over time
it can reasonably estimate its progress toward satisfaction of the performance obligations.
Company recognizes revenues and gross profits each period based upon the progress of the construction—referred to as the
How to measure progress?
Input measures (cost, hours worked)
Output measures (units delivered)
Most popular: cost-to-cost.
Recognize revenue, costs and gross profit as a company makes progress toward completion.
Company accumulates construction costs plus gross profit in an inventory account (‘Construction in Process’, ‘CiP’), and progress billings in a contra inventory account (‘Billings on CiP’)