Construction Contracts and Long-Term Contracts
Long-term construction contracts recognize revenue over time using the percentage-of-completion method when progress can be reliably measured, typically based on costs incurred relative to total estimated costs.
Explanation
Under ASC 606, construction contracts that meet the criteria for over-time recognition (typically because the entity creates an asset with no alternative use and has an enforceable right to payment for work completed) use an input method (cost-to-cost) or output method to measure progress. Revenue recognized equals the percentage complete times total estimated contract revenue.
When the outcome cannot be reliably estimated, revenue is recognized only to the extent of costs incurred that are expected to be recovered (the zero-profit method). If a contract is expected to result in a loss, the entire estimated loss must be recognized immediately in the current period, regardless of the stage of completion.
Key Points
- •Cost-to-cost method: % complete = costs incurred / total estimated costs
- •Revenue recognized = % complete × total estimated revenue
- •Expected losses recognized immediately and in full
- •Contract assets (underbilling) and contract liabilities (overbilling) reported on balance sheet
Exam Tip
Know how to calculate revenue, gross profit, and the balance sheet accounts (construction in progress, billings) at any stage. Loss contracts are a common exam scenario.
Frequently Asked Questions
Related Topics
Revenue Recognition (ASC 606)
ASC 606 provides a five-step framework for recognizing revenue from contracts with customers, replacing industry-specific guidance with a single, principles-based model.
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
Contingencies and Commitments
A contingency is an existing condition involving uncertainty about possible gain or loss that will be resolved when future events occur, accounted for under ASC 450.
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