Percentage of Completion Method | Intermediate Accounting | CPA Exam FAR | Chp 18 p10

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Farhat's Accounting Lectures
Published at : 05 Dec 2020
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In this video, I cover the percentage of completion method. The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period. The percentage of completion method calculates the ongoing recognition of revenue and expenses related to longer-term projects based on the proportion of work completed. Farhat Accounting Lectures can help you understand percentage of completion method.

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Long­term contracts frequently provide that the seller (builder) may 
bill the purchaser at intervals, as it reaches various points in the project. Examples of long­term 
contracts  are  construction­type  contracts,  development  of  military  and  commercial  aircraft, 
weapons delivery systems, and space exploration hardware. A company satisfies a performance 
obligation and recognizes revenue over time if at least one of the following three criteria is met: 
1.  The  customer  simultaneously  receives  and  consumes  the  benefits  of  the  seller’s 
performance as the seller performs. 
2.  The company’s performance creates or enhances an asset that the customer controls as 
the¬†asset¬†is¬†created¬†or¬†enhancedÕ嬆or¬†
3.  The company’s performance does not create an asset with an alternative use. In addition 
to this alternative use element, at least one of the following criteria must be met: 
a.  Another  company  would  not  need to  substantially  re­perform the  work the  company 
has completed to date if that other company were to fulfill the remaining obligation to 
the owner. 
b.  The  company  has  a  right  to  payment  for  its  performance  complete  to  date,  and  it 
expects to fulfill the contract as promised. 
Therefore,  if  criterion  1,  2  or  3  is  met,  then  a  company  recognizes  revenue  over  time  if  it  can 
reasonably  estimate  its  progress  toward  satisfaction  of  the  performance  obligations.  That  is,  it 
recognizes¬†revenues¬†and¬†gross¬†profits¬†each¬†period¬†based¬†upon¬†the¬†progress¬†of¬†the¬†construction‚ÄĒ
referred to as the percentage­of­completion method.  
Alternatively,  if  the  criteria  for  recognition  over  time  are  not  met,  the  company  recognizes 
revenues  and  gross  profit  at  a  point  in  time,  that  is,  when  the  contract  is  completed.  This 
approach is the completed­ contract method.
percentage of completionpercentage of completetionpercentage of completion method accounting

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