Accounting Method Alternatives for the Construction Contractor


In this case, however, Build-It should be able to finish the property and turn it over to another buyer. And this demonstrates another reason why point-in-time recognition may be appropriate for them to use. Once they do, their costs and income will shift from the balance sheet to their income statement. When contracts are of such a short-term nature that the results reported under the completed contract method and the percentage of completion method would not vary materially. Cash basis is a major accounting method by which revenues and expenses are only acknowledged when the payment occurs. Cash basis accounting is less accurate than accrual accounting in the short term.

The logic behind the percentage-of-completion method is that both the buyer and seller have obtained enforceable rights. The buyer has the right to require specific performance on the contract; the seller has the right to require progress payments. Thus the facts seem to indicate that a continuous “sale” is in progress. In the construction industry, two accounting approaches have developed over the years regarding the recognition of revenue.

Efforts Expended Method

With the percentage of completion method, the customer is legally obligated to pay as the project goes through stages of construction. With the completed contract method, the contract states that the legal obligation is fulfilled once the project is done. The percentage of completion method is different because it often takes more than a year to complete the work, therefore the contractor wants to recognize his earnings as he progresses.

As such, it is considered that both the buyer and the seller have enforceable rights. The buyer carries the right to implement specific performance requirements in the contract while the seller has the right to ask for payments based on fulfilling these requirements. These adjustments ensure that the income shown on the income statement is reflective of the percentage of completion method. Use of the percentage-of-completion method, versus the completed contract method results in higher ______.

Advantages of a Completed Contract Method

Then determine the tax implications of making the change to the proper method, and adjust your tax planning accordingly. The instalment sales method is a strategy for the revenue recognition process where revenue gets recognized when cash is exchanged for the goods sold…. For the installment-sales method, the percent-of-completion method, and the completed contract method of handling operating expenses, provide examples of situations when each method will be the most appropriate. IFRS 15, Revenue from Contracts with Customers, is a new accounting standard issued by the International Accounting Standards Board in May 2014. The standard recognizes revenue from contracts with customers and replaces the previous revenue recognition guidance.

What is CCM in contracting?

The Certified Construction Manager® (CCM®) recognizes professionals who have chosen a career in construction management and voluntarily met the prescribed criteria of the construction management certification program with regards to formal education, field experience, and demonstrated capability and understanding of …

Because of uncertainty regarding or collection of the contract price, income cannot be recognized until the project is completed and collections have been made. The method does use a construction in progress account, but it does not include income during the project. Billings represents the actual amount that has been billed to the purchaser and is liability which is a measure of the contractor’s obligation to perform. Alternatively, the percentage complete may be estimated using an annual completion factor. The application of the PCM is further complicated by job cost allocation policies, change orders and changes in estimates.

Percentage-of-Completion Method

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There should be no terms in the contract with the only purpose of deferring tax. While guidance for revenue recognition may have changed in recent years, contractors will find much from the completed contract method alive and well. If the gist is to hold off revenue from the income statement until it’s assured, ASC 606 point-in-time recognition uses a similar procedure. Where the completed contract method looks at contracts, however, ASC 606 looks at performance obligations. Additionally, contractors who wish to take advantage of tax deferral benefits from point-in-time transfers, they may need to make sure that their contracts provide the appropriate conditions for that method. A contract for $4million has total estimated costs of $3.75million, and an estimated profit of $250k.

What are the Certified Payroll Requirements for Federal Construction Jobs?

completed contract method method refers to the rules a company follows in reporting revenues and expenses in accrual accounting and cash accounting. Therefore, if the project is deemed to be 40% complete, the business would report 40% of the $4 million project revenue ($4 million x 0.4). The firm will also report 40% of the $3 million in expenses ($3 million x 0.4). This calculation will result in a current gross profit of $400,000 ($4 million x 0.4) — ($3 million x 0.4). A company using this method may arrange milestones throughout the building process or estimate the percentage of the project completed. As long as particular amounts of income and expenses can be attributed to each completed part, whether via percentage calculation or defined milestones, the activities are reportable.

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Therefore, the $62,500 remaining revenue on the contract—$100,000 minus the $37, recognized in 20X2—was recognized in 20X3. The completed-contract method allows companies to defer revenue recognition until a project is complete. Companies can recognize revenue on their income statements only after a project is finished and all billings have been collected. Some companies need to have a way to recognize a portion of the revenue earned from a long-term contract before the project has been completed. In looking at the options discussed above, most contractors use the accrual method of accounting and the percentage completion method of recording jobs, as lenders and bonding agencies generally prefer it.