Under ASC 606 / IFRS 15, how is revenue generally recognized for long-term construction contracts?

• A. Based on percentage of completion using cost-to-cost method
• B. Revenue equals sum of invoices
• C. Only when all cash is collected
• D. Revenue recognized only at installation completion

Answer: (D)

Revenue recognition for long-term construction contracts is driven by progress toward satisfying the performance obligation, not by when cash is collected or when installation finishes. Under ASC 606 / IFRS 15, if the customer benefits from the work as it’s being performed and the entity has an enforceable right to payment for the work to date, revenue is recognized over time as progress is made.

The common way to measure that progress is the cost-to-cost method: calculate the percentage of completion as costs incurred to date divided by total estimated costs. Multiply that percentage by the total expected contract revenue to determine revenue recognized to date, while costs incurred to date are recorded as costs. This approach aligns revenue with the transfer of control and the ongoing performance.

For example, if the project is expected to generate 1,000 in revenue and costs are estimated at 600 in total, and 300 costs have been incurred to date, the percentage complete is 300/600 = 50%. Recognize 500 in revenue to date (50% of 1,000) and 300 in costs to date. As estimates change, recognize adjustments prospectively. Revenue is not simply the amount billed, nor is it strictly when cash is collected or when installation is completed.