Summary Business Accounting

Question:

When percentage-of-completion accounting is not appropriate, U.S. GAAP requires the use of the

completed contract method, while IFRS requires the use of the cost recovery method. Explain how the

two methods affect recognition of revenue, cost of construction, and gross profit over the life of a

profitable contract.



Answer:



The completed contract method recognizes revenue, cost of construction, and gross profit at the end of

the contract, after the contract has been completed. The cost recovery method will recognize an amount of

revenue equal to the amount of cost that can be recovered, which typically is an amount that exactly

offsets costs until all costs have been recovered, and then will recognize the remaining revenue and gross

profit. Therefore, revenue and cost are recognized earlier under the cost recovery method than under the

completed contract method, but gross profit recognition is delayed until late in the contract for both

approaches. Assuming that the final costs are incurred just prior to completion of the contract, both

approaches should recognize gross profit at the same time.