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Percentage of completion (PoC) is an accounting method of work-in-progress evaluation, for recording long-term contracts. GAAP allows another method of revenue recognition for long-term construction contracts, the completed-contract method.
The Completed-contract method is an accounting method of work-in-progress evaluation, for recording long-term contracts. GAAP allows another method of revenue recognition for long-term construction contracts, the percentage-of-completion method. With this method, revenue is recognized when the contract is fulfilled.
For 2020 you take the contract price of $10,000,000 and subtract the total of both previous years revenue which is $5,900,000 to get 2020 completed revenue of $4,100,000. To compute the gross profit for 2018 you take 2018 revenue of $2,900,000 and subtract the actual cost to date of $2,291,000 to get a gross profit of $609,000 for 2018.
By their nature, construction activities and contracts are long-term projects, often beginning and ending in different accounting periods. Until its replacement with IFRS 15 in January 2018, IAS 11 helped accountants with measuring to what extent costs, revenue and possible profit or loss on the project are incurred in each period.
In May 2014, the FASB and IASB issued new, converged guidance on revenue recognition. This guidance, known as ASC 606 (or IFRS 15), aims to improve consistency in recognizing revenue from contracts with customers. [3] ASC 606 became effective in 2017 for public companies and 2018 for private companies. [4]
A main purpose of the project to develop IFRS 15 was that, although revenue is a critical metric for financial statement users, there were important differences between the IASB and FASB definitions of revenue, and there were different definitions of revenue even within each board's guidance for similar transactions accounting for under different standards. [3]