CONSTRUCTION CONTRACT REVENUE RECOGNITION
CONSTRUCTION CONTRACT REVENUE RECOGNITION
Keywords: Construction contracts; revenue recognition; percentage-of-completion method; completed-contract method; contract revenue; cost-to-cost method; contract costs
The principal concern of accounting for long-term construction contracts involves the timing of revenue (and profit) recognition. It has been well accepted that, given the long-term nature of such projects, deferring revenue recognition until completion would often result in the presentation of periodic financial reports that fail to convey the true level of periods of no apparent activity of the reporting entity during the period. In extreme cases, in fact, there could be periods of no apparent activity, and others of exaggerated amounts, when in fact the entity was operating in rather constant rate of production during all of periods. To avoid these distortions, the percentage-of-completion method was developed, which reports the revenues proportionally to the degree to which the projects are being completed, even absent the full completion and, in many cases, even absent the right to collect for the work done too late The major challenges in using percentage-of-completion accounting are to accurately gauge the extent to which the projects are being finished and to asses the ability of the entity to actually bill and collect for the work done. Since many projects are priced at fixed amounts, or in some other fashion prevent the passing through to the customers the full amount of cost overruns, the computation of periodic profits must be sensitive not merely to the extent to which the project is nearing completion, but also to the terms of the underlying contractual arrangements.
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