Revenue Recognition for Construction Contracts

Iain Crabb's Profile

Revenue Recognition has been a hot button issue for my company recently and the methods used in construction can vary greatly from those accepted in other industries. The preferred methods are: Percent Complete, which is computed using estimates of the ending gross margin of the job. As costs are incurred revenue is recognized in proportion to costs incurred. This method is rather unique in the accounting world as it relies on estimates which can vary from month to month for computing the revenue to recognize. Completed Contract, is used primarily for smaller jobs where doing percent complete is too cumbersome. It is conservative by nature since all revenues are deferred until completion. I'm interested in any color users can add to this discussion. I've also got some good gaap interpretations about the topic which I'll post to the site soon.

Answers

Member's Profile

Iain:

I find that with most auditors, so long as you are working within an accepted accounting framework, you can convince them (and yourselves) to use a particular method so long as you have a consistent history to point to. In other words, if using percentage completion is favorable to your company and you want to establish it as your standard rev rec method, it would be useful to have one or preferably two years of projects that you can point to where you demonstrate that this method is representative of what you see most of the time.

I can see that there is some month-to-month variability you note, but is the process consistent when looked at over longer periods of time, or in general over most projects? If this doesn't fly straight up would it be possible to use this method wit a reserve against possible rev rec issues? Have you bounced this off of your auditor? What are they saying?

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Member's Profile

I have also seen milestone accounting which is similar but technically different from percent complete. For example, a project may have 5 key milestones on a linear path to completion. This would be the driver of revenue recognition irrespective of costs incurred.

I agree with John in that the approach mainly just needs to be rationale, systematic, and consistent.

Have you seen the AICPA guide on construction accounting? Just posted something under the technical accounting group on this. Here is the link: http://email.cpa2biz.com/cgi-bin15/DM/y/eeAJ0STJqK0G740cU20EW

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Proformative Advisor
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The percentage-of-completion method is required if the following exists - estimates of progress toward completion, revenues, costs are reasonably dependable, and an enforceable contract exists that clearly identifies the requirements of both parties, with consideration and terms of settlement.

vs.

The completed-contract method which is primarily for short-term contracts that do not meet the above requirements and/or they contain an element of risk to the contract requirements.

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