Percentage-of-Completion Method

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Description of Percentage of Completion Method. Explanation.

 

Percentage-of-Completion Method

Definition Percentage-of-Completion Method. Description


The Percentage-of-Completion Method prescribes the accounting treatment of revenue and costs associated with long-term construction projects, in which the outcome can be estimated reliably.


If the outcome of a construction project can be estimated reliably and if all other Revenue Recognition Criteria are met, revenue and costs should be recognized in proportion to the stage of completion of the construction activity (cf. IAS 11, ASC 605-35).


In order for an entity to estimate the outcome of a project reliably, it must be able to make a reliable estimate of total contract revenue, the stage of completion, as well as the costs to complete the contract.


There are a variety of ways to determine the stage of completion of a contract, such as surveys of work performed, the proportion of contract costs incurred to the estimated total contract costs, or completion of a physical proportion of the contract work.


In case that the outcome of a construction project cannot be estimated reliably, no profit should be recognized. Instead, contract revenue should only be recognized to the extent that contract costs incurred are expected to be recoverable (only applicable under IFRS; for U.S. GAAP, please compare Completed-Contract Method).


An expected loss on a construction contract should be recognized immediately in income as soon as such a loss becomes probable.


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