Chapter 10

Revenue Recognition:
Contracts with Customer – Long Term

Construction
Chapter 10
Introduction
A construction contract is one for a substantial asset like a bridge, a building an aerospace, a
dam a ship or a tunnel. Such contracts are likely to extend over more than accounting period,
and rules are needed to determine when the profit on them can be taken.
In addition, few entities can afford to wait until the end of the contract before being paid by
the customer. In practice, stage payments for work completed are agreed within the overall
contract, and partial payment is received from the customer.
Property developers and construction companies are typical for their contracts with customers
of a long-term nature. The biggest challenge is to decide whether the company should
recognize revenue over- time (spread during individual years of construction) or at the point of
time (one-time at the completion of a contract).
For property developers and construction companies, especially one situation is crucial:
• when the entity’s performance does not create an asset with alternative use to the entity
and
• the entity has an enforceable right to payment for performance completed to date, then
the revenue is recognized over time.
Revenue Recognition
Generally, companies recognize revenue at the point of sale because that is when the
performance obligation is satisfied. Though, as indicated in PFRS 15, wherein under certain
circumstances, companies recognize revenue over time.
Under certain situations, companies recognize revenue over-time. It should be noted that the
most notable framework in revenue recognition in which revenue may be recognized overtime
is long-term construction contract accounting.
Long-term contracts frequently provide that seller (builder) may bill the customer at intervals.
The most common examples are as follows:
• Development of military and commercial aircraft
• High-rise buildings
• Skyways, roads, and bridges
• Weapons-delivery systems
• Space exploration hardware
Revenue recognition depends on the performance obligation(s):
• Over-Time / Percentage of Completion
• Point-in-Time / Cost Recovery Method or Zero-Profit Approach
A company recognizes revenue OVER-TIME if at least one (or if any one) of the three criteria is met:
1. The customer CONSUMES the benefit of the seller’s work as it is performed, or
Example 1 – Consumes
Service contracts such as cleaning services, monthly payroll processing service
2. The customer CONTROLS the asset as it is created or enhanced i.e., when the company’s performance creates or
enhances an asset, or
Example 2 – Controls
Work in process or when a contractor builds an extension into a customer’s existing school
building
3. The seller is creating an asset that has No ALTERNATIVE use to the seller, and the seller can receive payment for its progress
to date even if the customer cancels the contract as when a company manufactures customized product
Example 3 – No Alternative Use
Construction contract of a school building; manufactures customized fighter jets for the
Philippine Air Force.
If criterion 1 or 2 or 3 is met, then a company recognizes revenue OVER-TIME if it can reasonably estimate its progress toward
satisfaction of the performance obligations. Recognize revenue in proportion to the amount of the performance obligation that
has been satisfied.
If criteria (1 or 2 or 3 above) is not met, revenue should be recognized at a point in time (the company recognizes revenues
and gross profit when the contract is completed) referred to as the POINT-in-TIME/cost-recovery (zero-profit) method. This
method recognizes revenue only to the extent of costs incurred that are expected to be recoverable. Only after all costs are
incurred when gross profit will be recognized.
The performance obligation is satisfied when control of the goods or services is transferred from the seller to the customer.
Usually transfer of control is obvious, and coincides with delivery
What is a Construction Contract?
It requires the treatment of a contract to last for a period of more than one year. The main point is that the
contract activity starts in one financial period and ends in another, thus creating the problem to which of the
two or more periods contract income and costs should be allocated. In fact, the definition given in the
standard on construction contract is very clear-cut.
A construction contract is a contract specifically negotiated for the construction of an asset or a combination of
assets that are closely interrelated or interdependent in terms of their design, technology and function or their
ultimate purpose or use.
Types of Construction Contract
The standard differentiates between fixed-price contracts and cost-plus contracts as follows:
1. Fixed-price contract. A contract in which the contractor agrees to a fixed price, or a fixed rate per unit of
output, which in some cases is subject to cost escalation clauses
2. Cost-plus contract. A construction contract in which the contractor is reimbursed for allowable or otherwise
defined costs, plus a percentage of these costs or a fixed fee
Construction contracts may involve the building of one asset, like a bridge, or a series of interrelated assets, like
an oil refinery. They may also include rendering of services such as architects or restoring or demolishing an
asset.
Merging and Sectioning Construction Contracts
Issues that determine whether the construction of a series of assets under singular contract
should be treated as several contracts:
1. Identifiable costs and revenues can be separated for each asset;
2. Separate proposals are submitted for each asset; and
3. Separate negotiations are undertaken for each asset; the customer can accept/reject
each individually.
There are also situations where a group of contracts should be treated as singular construction
contract:
1. The contracts are performed together or in a single sequence;
2. The group of contracts are negotiated as one package; and
3. Contracts are closely interrelated with an overall profit margin
Construction Revenue
Construction revenue is the total amount of consideration receivable under the contract. In the early
stages of a contract:
• the contract revenue will often be an estimate of what the final amount will be, as it may be
dependent on the outcome of future events
• the contract revenue may alter where it is possible for the contractor to make claims against the
customer, or a third party, for costs that were not originally included in the contract.
Contract revenue comprises:
• The initial amount of revenue agreed in the contract
• The variations in contract work and claims, to the extent that:
- It is probable that they will result in revenue
- They are capable of being reliably measured.
The types of uncertainty, which depend on the outcome of future events that affect the measurement of
contract revenue:
- An agreed variation (increase/decrease);
- Cost escalation clauses in a fixed price contract (increase);
- Penalties imposed due to delays by the contractor (decrease); and
- Number of units varies in a contract for fixed prices per unit (increase/decrease).
In the case of any variation, claim, or incentive payment, two factors should be assessed to determine whether or not contract revenue
should be recognized:
1. It is probable that the customer will accept the variation or claim, or that the contract is sufficiently advanced that the
performance criteria will be met; and
2. The amount of the revenue can be reliably measurable.
Variations in Contract Work:
A variation is an instruction by the customer for a change in the scope of the work to be performed under the contract.
Example 4
Variations are changes in the specifications or design of the asset and changes in the duration of the contract
Incentive payments (additional payments) made to the contractor if performance standards are met or exceeded) when:
- The contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded; and
- The amount of the incentive can be measured reliably.
Example 5
A contract may allow for an incentive payment to the contractor for early completion of the contract
Claims
A claim is an amount that the contractor seeks to collect from the customer or another party as reimbursement for costs not included in
the contract price.
A claim may arise from, for example:

• delays caused by the customer,
• errors in specifications or design, and
• disputed variations in contract work.
Contract revenue is reduced by the amount of any penalties arising from delays caused by the contractor in the completion of the
contract.
The result is that the construction revenue is measurable at fair value.

Construction Costs
PFRS (IFRS) 15 states that the following cost must be capitalized:

1. The incremental costs of obtaining a contract
2. The cost of fulfilling a contract if they do not fall within the scope of another standard [such as PAS (IAS) 2 – Inventories]
and the entity expects them to be recovered.
Companies divide cost to fulfill a contract or fulfillment costs (contract acquisition costs) into two categories:
• those that give rise to an asset
• those that are expensed as incurred
The capitalized costs will be amortized as revenue is recognized. This means that they will be expensed to cost of
construction/sales as the contract progresses.
Therefore, construction costs should comprise of:

1. Costs that relate directly to the specific contract;
2. Costs that are attributable to contract activity in general and can be allocated to the contract, such as insurance, cost of
design and technical assistance not directly related to a specific contract and construction overheads; and
3. Such other costs which are specifically chargeable to the customer under the terms of the contract, which may include
general administration costs and development costs.
Costs that relate directly to a specific contract include the following:

1. Site labor costs, including site supervision;
2. Costs of materials used in construction;
3. Depreciation of plant and equipment used on the contract;
4. Cost of moving plant, equipment and materials to and from the contract site;
5. Cost of hiring plant and equipment;
6. Cost of design and technical assistance that are directly related to the contract;
7. Estimated costs of rectification and guarantee work, including expected warranty costs; and
8. Claims from third parties.
General contract activity costs should be allocated systematically and rationally, and all costs with similar
characteristics should be treated consistently. The allocation should be based on the normal level of
construction activity. Borrowing cost may be attributed in this way.
Costs that may be attributable to contract activity in general and can be allocated to specific contracts
include:
1. Insurance;
2. Costs of design and technical assistance that are not directly related to a specific contract;
3. Construction overheads
Some costs cannot be attributed to contract activity and so the following should be excluded from
construction costs:
1. General administration costs (unless reimbursement is specified in the contract);

2. Research & Development (unless reimbursement is specified in the contract);
3. Depreciation of idle plant and equipment not used on any particular contract;
4. Cost of wasted materials, labor or other resources; and
5. Costs that related to satisfied performance obligations
Special Issues on Recognition of Contract Costs
1. Costs are recognized in the same proportion that applies to the recognition of revenue, except for the following:
• Abnormal costs (e.g. to rectify an error in the production or service process) are expensed as incurred; and
• Input costs that are not proportionate to the construction process
2. If an incurred cost is not proportionate to the progress in the satisfaction of the performance obligation that cost
shall be excluded when measuring the progress of the contract.
3. In this situation revenue will be recognized to the extent of the actual cost incurred in respect of that component.
Example 6 – Non-Proportionate Costs

DJD Builders is constructing a property for a customer for a contract price of P4,000,000. Construction of the
property is a single performance obligation satisfied over time.
The total costs of the contract are expected to be P3,000,000, of which P1,000,000 is for the elevators to be
included in the property. The elevator is a distinct component of the contract and the customer obtains control of
the elevator before the property itself has been completed.
Costs incurred to date are P1,400,000 of which P1,000,000 is in respect of the elevator. Revenue is recognized based
on the input costs incurred to date.
DJD Builders will recognize revenue as follows:

Elevator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000
Other [(1,400-1,000, elevator)/2,000 (3,000,000-1,000,000)
x(P4,000,000 – P1,000,000)). . . . . . . . . . . . . . 600,000
Total revenue recognized is P1,600,000 with costs recognized of P1,400,000.

4. Companies recognize an asset for the incremental costs (or incremental costs of obtaining a contract) if these costs are incurred to
obtain a contract with a customer. The incremental costs of obtaining a contract, such as mentioned below (a, b and c) are
recognized as an asset if the entity expects to recover them:
a. Sales commissions;
b. Direct labor, direct materials, and allocation of costs that relate directly to the contract (e.g., costs of contract management
and supervision, insurance, and depreciation of tools and equipment); and;
c. Costs that generate or enhance resources of the company that will be used in satisfying performance obligations in the
future. Such costs include intangible design or engineering costs that will continue to give rise to benefits in the future.
Costs to obtain the contract that would have been incurred regardless of whether the contract was obtained are charged to expense
when incurred. Other costs that are expensed as incurred include general and administrative expenses as well as costs of waste, labor,
or other resources to fulfill the contract that were not reflected in the price of the contract.
In summary, companies only capitalize costs that are direct, incremental, and recoverable (assuming that the contract period is more
than one year).
Example 7 – Incremental Costs
DJ Builders enters into a contract with a customer to transfer a software license, perform installation and provide software
updates and technical support for three years in exchange for P2,400,000. In order to win this contract, Jackson incurred the
following costs:
Legal fees for drawing up the contract……… P 100,000
Travel costs to deliver proposal………………… 200,000
Commissions to sales employee……………….. __120,000
Total………………………………………………….. P 420,000
Analysis/Solution:
The travel costs should be expensed because they would have been incurred even if the developer did not get the
contract.
The legal fees and sales commissions should be recognized as assets because they are costs of obtaining the contract,
assuming that the developer expects to recover them
Recognition of Contract Revenue and Costs/Expenses
Contract revenue and costs in each accounting period to reflect the stage of completion of the contract. The application of
this recognition depends on the criterion of PFRS 15.
In order that there is a reliable measurement, allows contract revenue and costs to be recognized when the outcome of the
contract can be predicted, i.e., when it is probable that the economic benefits attached to the contract will flow to the
enterprise. The contract can only be done when it has been agreed to establish the following:
1. The enforceable rights of each party in respect of the asset to be constructed;
2. The consideration to be exchanged; and
3. Terms and manner of settlement
Example 8 – Recognition of Contract Costs

Ambo enters into a contract with a customer to transfer a software license, perform installation and provide
software updates and technical support for three years in exchange for P2,400,000. In order to fulfill the
technical support portion of the project, Ambo purchases an additional workstation for the technical
support team for P80,000 and assigns one employee to be primarily responsible for providing the technical
support for the customer. This employee also provides services for other customers. The employee is paid an
annual salary of P300,000 and is expected to spend 10% of his time supporting this customer.
Analysis/Solution:
The travel costs should be expensed because they would have been incurred even if the developer did not
get the contract.
The legal fees and sales commissions should be recognized as assets because they are costs of obtaining
the contract, assuming that the developer expects to recover them.
Determining the Transaction/Contract Price with Variable Consideration
The transaction price is the amount of consideration that a company expects to receive from a customer in exchange
for transferring goods and services. The transaction price in a contract is often easily obtained because the customer
agrees to pay a fixed amount to the company over a short period of time.
In measuring the transaction price for other contracts, companies must consider the following factors for adjustment:
1. Variable consideration
2. Time value of money
3. Non-cash consideration (discussion in Chapter 12) , and
4. Consideration paid or payable to customer (discussion in Chapter 12).
Variable Consideration. In construction there might be performance bonuses (incentive payments) granted for
efficiency purpose. A company estimates the amount of variable consideration it will receive from the contract to
determine the amount of revenue to recognize and includes that amount in the contracts transaction price when the
contractor believes it is probable that it will have to be reverse (adjust downward) a significant amount of revenue in
the future because of a change in that variable consideration.
Time Value of Money. Companies use either (1) the expected value, which is a probability weighted amount, or (2) the
most likely amount in a range of possible amounts to estimate variable consideration.
When transaction relatively near each other, the financing component is not significant and can be ignored. As a
practical matter, sellers can assume the financing component is not significant if the period between delivery and
payment is less than a year (refer to Chapter 12). However, if the financing component is significant, sellers must take
it into account, both when a prepayment occurs and when an account receivable occurs.
Illustration 10-1: Contract Price with Variable Consideration (Time Value of Money)
DJ Builders enters into a contract with a customer to build an apartment building for P1,000,000. The customer hopes to rent
apartments at the beginning of the school year and provides a performance bonus of P150,000 to be paid if the building is
ready for rental beginning August 1, 20x4. The bonus is reduced by P50,000 each week that completion is delayed. DJ Builders
commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following
completion outcomes:
Completed by Probability
August 1, 20x4……………………………………………… 70%
August 8, 20x4……………………………………………… 20%
August 15, 20x4……………………………………………. 5%
After August 15, 20x4……………………………………… 5%
The transaction price should include management’s estimate of the amount of consideration to which the entity will be
entitled. Given the multiple outcomes and probabilities available based on prior experience, the probability-weighted method
is the most predictive approach for estimating the variable consideration in this situation:
Completion Date Probability Expected/Present Value
August 1………… 70% chance of P1,150,000 = P 805,000
August 8………… 20% chance of (P1,150,000 – P50,000) = 220,000
August 15………. 5% chance of (1,150,000 – P50,000 – P50,000)= 52,500
After August 15.. 5% chance of (P1,150,000 – P50,000 – P50,000 – P50,000 = 50,000
Total…………….. P1,127,500
Thus, the total transaction price is P1,127,500 based on the probability-weighted estimate.
On the other hand, to determine the transaction price for the contract, assuming:
1. DJ Builders is only able to estimate whether the building can be completed by August 1, 20x4, or not (DJ Builders estimates
that there is a 70% chance that the building will be completed by August 1, 20x4. Therefore, in this situation, DJ Builders uses
the most likely amount as the estimate, P1,150,000.
2. When there is limited information with which to develop a reliable estimate of completion, then no revenue related to the
incentive should be recognized until the uncertainty is resolved. Therefore, no revenue is recognized until the completion of
the contract because DJ Builders has limited information with which to develop a reliable estimate of completion by the
August 1, 20x4, deadline.
A reliable estimate of the outcome of the construction contract can only be made when certain
conditions have been met, and these conditions will be different for fixed price and cost plus contracts:
1. Fixed-price Contract Price
• Probable that economic benefits of the contract will flow to the enterprise;
• Total contract revenue can be reliably measured;
• Stage of completion at the period end and costs to complete the contract can be reliably measured;
and
• Costs attributable to the contract can be identified clearly and be reliably measured (actual costs
can be compared to previous estimates).
Illustration 10-2: Fixed-price Contract Price

The following information relates to a fixed price contract:
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P100,000
Costs to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Total estimated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
% of completion (P48,000 / P80,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60%
The amounts to be recognized in the statement of comprehensive income (income statement) are:
Revenue (60% x P100,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P60,000
Less: Costs / Expenses (60% x P80,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Gross profit (60% x P20,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P12,000
2. Cost-plus Contract Price
• Probable that economic benefits of the contract will flow to the enterprise
• Costs attributable to the contract (whether or not reimbursable) can be identified clearly and be reliably
measured
Illustration 10-3: Cost-plus Contract Price

The following information relates to a cost plus contract obtained by the business on December 31 year end:
20x3 20x4
Cumulative costs incurred on work to date . . . . . . . . . . . P100,000 P150,000
Agreed profit as a percentage of costs . . . . . . . . . . . . . . 20% 20%
The outcome of the contract can be estimated reliably at both year ends.
To prepare the statement of comprehensive income for each of the two years, the business calculates the
costs incurred, assesses the profit that should be recognized and inserts recognized in profit or loss.
20x3
Revenue [Cost of P100,000 plus (20% x P100,000)] . . . . . . . . . . . . . . . . . . P120,000
Less: Costs / Expenses (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Gross profit (20% x P100,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 20,000
20x4
Revenue [Cost of P50,000 plus (20% x P50,000)] . . . . . . . . . . . . . . . . . . . . P 60,000
Less: Costs / Expenses (P150,000 less P100,000 in 20x3) . . . . . . . . . . . . . . __50,000
Gross profit (20% x P50,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 10,000
Over-Time/Percentage-of-Completion
The over-time/percentage-of-completion method is an application of the accrual assumption. This method is used
when the outcome of the construction contract can be estimated reliably; contract revenue and contract costs
associated with the construction contract should be recognized as revenue and expenses, respectively, by reference
to the stage of completion of the contract activity at the end of the reporting period.
Measuring the Percentage-of-Completion (Over-Time)
The over-time/percentage-of-completion approach avoids the mismatch between costs being recognized as they
are incurred and revenue only being recognized when the contract is completed. This would not reflect commercial
substance, because the contractor earns revenues as the project activity progresses.
Various methods are currently used in practice to measure the earnings process. Depending on the nature of the
contract, they can be conveniently grouped into two categories: input and output measures:
1. Input Measures/Cost Basis. Input measures are made in relation to the costs or efforts devoted to a contract.
• Input methods recognize revenue on the basis of the efforts or inputs to satisfy the performance obligation
relative to the total expected inputs.
• Examples of input methods include:
a. Labor-hours worked
b. Costs incurred
c. Time elapsed
d. Resources consumed
• Revenue can be recognized on a straight-line basis if inputs are used evenly throughout the performance period.
They are based on an established or assumed relationship between a unit of input and productivity. They
include the widely used cost-to-cost method and several variations of efforts-expended methods.
a. Cost-to-Cost method (Proportion of contract costs incurred). Perhaps the most popular of the input
measures is the cost-to-cost method. Under this method, the degree of completion is determined by
comparing costs already incurred with the most recent estimates of total expected costs to complete
the project.
The percentage that costs incurred bear to total expected costs is applied to the contract price to
determine the revenue to be recognized to date as well as to the expected net income on the project
in arriving at earnings to date. Some of the costs incurred, particularly in the early stages of the
contract, should be disregarded in applying this method because they do not relate directly to effort
expended on the contract.
These include such items as subcontract costs for work that has yet to be performed and standard
fabricated materials that have not yet been installed. One of the most difficult problems in using this
method is estimating the costs yet to be incurred.
Illustration 10-4: Input Measures: Cost-to-Cost method
Assume that in January 20x3 JJD Construction Company was awarded a contract with a total fixed price of P300,000.
JJD expected that the total costs on the contract will be P260,000. The construction was completed over a three-year
period, and the cost data and cost percentages shown below were compiled during that time.
Note that the percentage of completion is computed as follows:
Cost incurred to date

= Percent Complete
Total Estimated Cost (most recent)
(1) (2) (3) (4)

Actual Cost Estimated Cost to Total Estimated Percentage of
Incurred to Date Complete Costs completion
Year. (1) + (2) (1)/(3)
20x3 . . . . . . . . . . . . . . . . . . . . P 104,000 P 156,000 P 260,000 40
20x4 . . . . . . . . . . . . . . . . . . . . 91,000
Total . . . . . . . . . . . . . . . . P 195,000 65,000 260,000 75
20x5 . . . . . . . . . . . . . . . . . . . . 65,000
Total . . . . . . . . . . . . . . . . P 260,000 0 260,000 100
b. Efforts-expended methods. The efforts-expended methods are based on some measure of
work performed. They include labor hours, labor pesos, machine hours, or material
quantities. In each case, the degree of completion is measured in a way similar to the use
in the cost-to-cost approach: the ratio of the efforts expended to date to the estimated
total efforts to be expended on the entire contract. For example, if the measure of work
performed is labor hours, the ratio of hours worked to date to the total estimated hours
would produce the percentage for use in measuring income earned.
2. Output Measures/Sales Basis
• Output measures are made in terms of results achieved
• Examples of output methods include:
a. Surveys of work performed or performance completed to date (the value of “work certified” to date may be a
measure used to identify the degree of completion and therefore revenue to be recognized in profit or loss)
b. units produced or delivered
c. tons produced,
d. Storey’s of a building completed,
e. appraisals of results achieved,
f. kilometers of a highway completed,
g. contract milestones reached or achieved,
h. time elapsed and
i. values added.
Example 9
A contract calls for units of output, such as kilometers of roadway, a measure of completion
would be a ratio of the miles completed to the total kilometers in the contract
Output methods should only be used when the output selected represents performance towards complete
satisfaction of the performance obligation.
The disadvantage of output methods is that the outputs used may not be available or directly observable. When this is
the case, an input method may be necessary
Architects and engineers are sometimes asked to evaluate jobs and estimate the percentage of a job completed
(surveys of work performed). These estimates are, in reality, output measures and usually are based on the physical
progress made on the contract. This may be appropriate for the construction of buildings.
Both Input and Output Measures have certain disadvantages.
• Input measure is based on an established relationship between a unit of input and productivity. If
inefficiencies cause the productivity relationship to change, inaccurate measurements result.
• Output measures can result to inaccurate measures if the units used are not comparable to time,
effort, or cost to complete.
Thus, the application of percentage-of-completion is as follows:

1. Recognize contract revenue as revenue in the accounting periods in which the work is performed;
2. Recognize contract costs as an expense in the accounting period in which the work to which they
relate is performed;
3. Any costs incurred which relate to future activity should be recognized as an asset if it is probable that
they will be recovered (often called construction in process);
4. Where amounts have been recognized as contract revenue, but their collectability from the customer
becomes doubtful, such amounts should be recognized as an expense, not a deduction from
revenue;
5. The procedures in recognizing revenue under the percentage-of-completion method do not affect
the progress billings made on the amount of cash collected. These amounts are determined by
contract and not by the accounting method used; and
6. Progress (billings) payments and advances received often do not reflect the work performed.
Illustration 10-5: Input Measures/Cost Basis: Cost-to-Cost Method
DJD Builders has a fixed price contract to build a waiting shed. The initial amount of revenue agreed is P440,000. At the beginning of the
contract on January 1, 20x3 the initial estimate of the construction costs is P400,000. By the end of 20x3 the estimate of the total costs
has risen to P404,000.
During 20x4 the customer agrees to a variation with increases expected revenue from the contract by P10,000 and causes additional
costs of P6,000. At the end of 20x4 there are materials stored on site for use in 20x5 which cost P5,000 during the period
DJD Builders has decided to determine the stage of completion of the contract by calculating the proportion that contract costs
incurred for work to date bear to the latest estimated total contract costs. The contract costs incurred at the end of each year (costs
Year Direct and Allocable Costs to date Billings Collections
incurred to date), billings and collections
20x3
for each year were as follows:
P105,040 P120,000 P100,000
20x4 308,400 (including materials in store) 200,000 190,000
20x5 410,000 130,000 160,000
The following analysis is to determine the percentage of completion: 20x3 20x4 20x5
Contract price:
Initial amount of contract . . . . . . . . . . . . . . . . . . . . . . . P440,000 P440,000 P440,000
Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______- __10,000 10,000
Total contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P450,000 P450,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . P105,040 *P203,360 P101,600
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . _______- _105,040 _308,400
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . P105,040 *P308,400 P410,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . _298,960 _101,600 _______-
Total estimated costs (2) . . . . . . . . . . . . . . . . . . . . . . . . . . P404,000 P410,000 P410,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 36,000 P 40,000 P 40,000
Percentage of completion (1) / (2) . . . . . . . . . . . . . . . . . 26% **74% 100%
* including the P6,000 additional costs in 20x4

** it should be noted that the percentage of completion for 20x4 is calculated by deducting the
P5,000 of materials held for the period from the costs incurred up to that year end,
The revenue, expenses (costs) and profit will be recognized in profit or loss as follows:
Recognized in Recognized in
20x3 To date prior years current year
Revenue (P440,000 x 26%) . . . . . . . . . . . . . . . . . P 114,400 - P 114,400
Costs/Expenses (P404,000 x 26%) . . . . . . . . . . . _105,040 - _105,040
Gross Profit (P36,000 x 26%) . . . . . . . . . . . . . . . . P 9,360 - P 9,360
Revenue (P450,000 x 74%) . . . . . . . . . . . . . . . . . P 333,000 P 114,400 P 218,600
Costs/Expenses (P410,000 x 74%) . . . . . . . . . . . _303,400 _105,040 _198,360
Gross Profit (P40,000 x 74%) . . . . . . . . . . . . . . . . P 29,600 P 9,360 P 20,240
Revenue (P450,000 x 100%) . . . . . . . . . . . . . . . . P 450,000 P 333,000 P 117,000

Costs/Expenses (P410,000 x 100%) . . . . . . . . . . _410,000 _303,400 _106,600
Gross Profit (P40,000 x 100%) . . . . . . . . . . . . . . P 40,000 P 29,600 P 10,400
It should be noted when the percentage-of-completion is determined using the contract costs incurred
to date, only contract costs reflecting the work to date should be included in costs incurred to date:
• Exclude costs relating to future activity, e.g., cost of materials delivered but not yet used;
• Exclude payments made to subcontractors in advance of work performed;
• Change Orders. Change orders are modifications of an original contract, which effectively change
the provisions of the contract. They may be initiated by the contractor or the customer, and they
include changes in specifications or design, method or manner of performance, facilities, equipment,
materials, location site, and so forth. Change orders are often unpriced, that is, the work to be
performed is defined, but the adjustment to the contract price is to be negotiated later. If it is
probable that a contract price change will be negotiated to at least recover the increased costs, the
increased costs may be included with the incurred costs of the period and the revenue may be
increased by the same amount; and
• Changes in Estimates. The effect of any change in the estimate of contract brought about by change
orders regarding revenue or costs or the outcome of a contract is accounted for as a change in
accounting estimate under PAS 8 Accounting Policies, Changes In Accounting Estimates and Errors. In
20x4, there was a variation in contract increasing the cost by P6,000 resulting to an increase of P10,000
in contract price. As estimated change, catch-up adjustments are made in the year of the change.
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3 20x4 20x5
Contract price:
Initial amount of contract . . . . . . . . . . . . . . . . . . . . . . . P440,000 P440,000 P440,000
Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______- __10,000 10,000
Total contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P450,000 P450,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . P105,040 P203,360 P101,600
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . _______- _105,040 _308,400
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . P105,040 P308,400 P410,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . _298,960 _101,600 _______-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . P404,000 P410,000 P410,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 36,000 P 40,000 P 40,000
Percentage of completion (1) / (3) . . . . . . . . . . . . . . . . . ____26% ____74% ___100%
Gross profit to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 9,360 P 29,600 P 40,000
Less: Gross profit in prior years . . . . . . . . . . . . . . . . . . . . . _______- ___9,360 __29,600
Gross profit in current year . . . . . . . . . . . . . . . . . . . . . . . . P 9,360 P 20,240 P 10,400
Following are the entries for the years 20x3 to 20x5:

20x3 20x4 20x5
1. To record costs incurred:
Construction In Progress* . . . . . . . . . . . 105,040 198,360 106,600
Materials Inventory . . . . . . . . . . . . . . . . 5,000 5,000
Cash, payables, etc . . . . . . . . . . . . 105,040 203,360 101,600
2. To record progress billings:
Accounts receivable . . . . . . . . . . . . . . 120,000 200,000 130,000
Progress billings* . . . . . . . . . . . . . . . 120,000 200,000 130,000
3. To record collections:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 190,000 160,000
Accounts receivable . . . . . . . . . . . 100,000 190,000 160,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction Expenses . . . . . . . . . . . . 105,040 198,360 106,600
Construction in Progress* . . . . . . . . . .. 9,360 20,240 10,400
Revenue from Construction . . . . . 114,400 218,600 117,000
5. To close Construction In Progress**
and Progress Billings account:
Progress billings . . . . . . . . . . . . . . . . . . . 450,000
Construction In Progress . . . . . . . . . 450,000
* The term “Contract account” may alternatively be used.

** If “Contract account” is used then no entry is required for No. 5.
Financial Statement Presentation: Over-Time/ Percentage-of-Completion
During the life of the contract, the difference between the Construction-In-Progress and the Progress Billings is reported in the statement of financial position as
follows:
• Current asset–Contract Asset. It comprises of total costs incurred on the contract, plus the cumulative recognized profit (or less cumulative recognized loss), less
progress billings (i.e., the amounts actually invoiced to customers for work performed on a contract whether or not they have been paid by the customers).
• Current liability–Contract Liability. It comprises of progress billings less total costs incurred on the contract, plus cumulative recognized profit (or less cumulative
recognized loss).
Multiple Contracts
When companies have more than one project going at a time and costs exceed billings on some contracts and billings exceeds cost on others. In such case, the
company segregates the presentation of the said contracts.
The asset portion includes only those contracts on which costs and recognized profits exceed billings. While, the liability side includes only those on which on which
billings exceed costs and recognized profits. Separate disclosures of the peso volume of billings and costs are preferable to a summary presentation for the
difference.
Using the data from the previous illustration, the DJD Builders would report the status and results of its long-term construction activities under the percentage of
completion as follows:
DJD Builders
Statement of Comprehensive Income (Income Statement)
20x3 20x4 20x5
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 114,400 P 218,600 P 117,000
Less: Costs / Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . _105,040 _198,360 _106,600
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 9,360 P 20,240 P 10,400
The following should be noted in the statement of comprehensive income:

1. Revenue and costs:
a. Sales revenue and associated costs should be recorded in the statement of comprehensive income (income statement) as the contract activity progresses.
b. Include an appropriate proportion of total contract value as sales revenue in the statement of comprehensive income (income statement).
c. The costs incurred in reaching the stage of completion are matched with this sales revenue, resulting in the reporting of results which can be attributed to the
proportion of work completed.
d. Sales revenue is the value of work carried out to date.
2. Profit recognized in the contract:
a. It must reflect the proportion of work carried out.
b. It should take into account known inequalities in profitability in the various stages of a contract.
Balance Sheet/Statement of Financial Position
Current Asset:
20x3 20x4 20x5
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 30,000 P -
Contract asset:
Construction In Progress . . . . . . . . . . . . . . . . . . . . . . . . . P333,000
Less: Progress billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . _320,000
Contract asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 13,000
Raw materials Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,000
Current Liability:
Payables (“Payments on Account”)
P120,000
Less: Construction In Progress . . . . . . . . . . . . . . . . . . . . . . . . _114,400
Contract Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . P 5,600
Construction in Progress Progress Billing

20x3 CI 105,040
120,000 20x3
Pr 9,360
End of x3 114,400 120,000 end of x3
20x4 CI 198,360 200,000 20x4
Pr 20,240
End of x4 333,000 320,000 end of x4
20x5 CI 106,600 130,000 20x5
Pr 10,400
450,000 450,000 450,000 450,000
Where: CI – cost incurred each year

Pr – profit
The following should be noted in the statement of financial position (balance sheet):
1. When the company has a number of projects and “Construction-In-Progress” account exceeds “Progress Billings” account on some contracts and “Progress
Billings” account exceed “Construction-In-Progress” account on others, the contracts should be segregated. The asset side should include only those contracts on
which costs and recognized profit (loss) exceeds billings, and the liability side includes those on which billings exceed costs and recognized profit (loss).
2. The operating cycle of a company that emphasizes long-term contracts is usually more than one year. All of the preceding balance sheet accounts would be
classified as current.
3. The “Construction-In-Progress” account contains costs incurred plus recognized profit (the two together equal total revenues recognized to date), at the
completion of the contract the balance in this account will exactly equal the amount in “Progress Billings” account, because the progress billings account
reflects the contract price (or total revenues).
Illustration 10-6: Output Measures/Sales Basis–Proportional Cost with Plant Assets Involved (refer also to Illustration 10-11 for further illustration)
On January 1, 20x5, Ambo enters into a contract with a customer to construct a building for consideration of P10,000,000. The contract is
expected to take two (2) years to complete. On December 31, 20x5, Ambo has incurred a costs of P2,400,000. Costs to complete are P2,000,000.
In addition to these costs, Ambo purchased plant to be used on the contract at a cost of P1,600,000. This plant was purchased on January 1, 20x5
and will have no residual value at the end of the two (2) year contract. Depreciation on the plant is to be allocated on a straight-line basis across
the contract.
On December 31, 20x5, the value of the work certified was P4,500,000, and the customer had paid P1,140,000. Ambo measures progress on
contract using an output method, based on the value of work certified to date which is 45% (P4,500,000/P10,000,000).
The following analysis is to determine the percentage of completion:

20x5
Contract price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P10,000,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . P 2,400,000
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . _________0
Actual costs incurred to date ….. . . . . . . . . . . . . . . . . . . . . . . . . . . . *P 2,400,000
Add: Estimated costs to complete
Costs to complete.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,000,000
Add: Plants assets (2-year life). . . . . . . . . . . . . . . . . . . . . . . . 1,600,000 __3,600,000
Total estimated costs (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 6,000,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,000,000
Percentage of completion – given per problem . . . . . . . . . . . . . . . . . . . . . ____ 45%
Revenue (P10,000,000 x 45%) . . . . . . . . . . . . . . . . . P4,500,000 - P4,500,000
Costs/Expenses (P6,000,000 x 45%) . . . . . . . . . . . _2,700,000 - **2,700,000
Gross Profit (P4,000,000 x 45%) . . . . . . . . . . . . . . . . P 1,800,000 - P 1,800,000
Alternatively, the gross profit may also be computed as follows:

Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,000,000
Percentage of completion ………. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______45%
Gross profit to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,800,000
Less: Gross profit in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _________0
Gross profit in current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,800,000
Current Asset 20x5

Contract asset:
Construction In Progress (P2,400,000 + P1,800,000 profit +
P800,000 depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,000,000
Less: Progress billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,140,000
Contract asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P3,860,000
Non-current Asset:
Property, plant and equipment (P1,600,000 – P800,000). . . . . . . . . . . . . . . . . . . . . . . . . . . P 800,000
Alternatively, the current asset could be split between receivables and inventory, rather than being held as a Contract
asset:
Current Asset 20x5

Accounts receivable (P4,500,000 – P1,140,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,360,000
Inventory: Work-in-progress
Actual costs spend to date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *P 2,400,000
Add: Depreciation to date . . . . . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . ___800,000
Costs to date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P3,200,000
Less: Cost/Expenses recognized in current year**. . . . . . . . . . . . . . . . . . . . . . . . . . 2,700,000
Work-in-progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 500,000
Point-in-Time / Cost Recovery Method or Zero-Profit Approach
Point-in-Time/Cost recovery method (zero-profit approach) of construction accounting is used when the contract’s
outcome cannot be reliably estimated. The treatment below should be followed:
1. Recognize revenue only to the extent of contract costs incurred which are expected to be recoverable; and
2. Recognize contract costs as an expense in the period they are incurred.
In other words, the point-in-time/cost recovery method gives rise to zero profit. A zero-profit/point-in-time approach
involves recognizing revenues equal to the amount of costs incurred during the period so that no profit is recognized.
But as soon as the ultimate outcome of a contract can be estimated, the percentage-of-completion is applied.
This no profit/no loss approach reflect the situation near the beginning of a contract, i.e., the outcome cannot be
reliably estimated, but it is likely to recover the costs.
Contract costs that cannot be recovered should be recognized as an expense immediately. The following are
situations where this might occur:
1. The contract is not fully enforceable, i.e. its validity is seriously questioned;
2. The completion of the contract is subject to the outcome of pending litigation or legislation;
3. The contract relates to properties which will probably be expropriated or condemned;
4. The customer is unable to meet its obligations under the contract; and
5. The contractor cannot complete the contract or in any other way meets his/her obligations under the contract.
When these uncertainties cease to exist, the contract revenue and costs should be recognized as normal by reference
to the stage of completion.
Illustration 10-7: Point-in-Time/Cost Recovery Method/Zero-Profit Approach
A business is not able to measure reliably the outcome of a contract, but estimates that all costs incurred
are recoverable from the customer. The following details are available:
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P100,000
Costs to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Total estimated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
% of completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
The amounts to be recognized in the statement of comprehensive income (income statement) are:
Revenue (equivalent to cost incurred) . . . . . . . . . . . . . . . . . . . . . . . . . . . . P30,000
Less: Costs / Expenses (equivalent to cost incurred) . . . . . . . . . . . . . . . . . 30,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P -
Illustration 10-8: Point-in-Time/Cost Recovery Method/Zero-Profit Approach
Assuming the same facts given for DJD Builders except that at the beginning and end of 20x3 (also in 20x4) the contractor cannot
estimate the outcome of the contract with sufficient reliability to estimate the project’s percentage-of-completion (because of the
uncertainties arising from the new design and new materials the entity cannot estimate total expected contract costs with sufficient
reliability). It is likely to receive the contract price from the customer. However it is probable that the costs incurred in 20x3 and 20x4 will
be recoverable. The contract was completed in 20x5. The following table shows the data needed for further analysis:
20x3 20x4 20x5
Contract price:
Initial amount of contract . . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P440,000 P440,000
Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______- __10,000 10,000
Total contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P450,000 P450,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . . . . P105,040 P203,360 P101,600
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . . . _______- _105,040 _308,400
Actual costs incurred to date . . . . . . . . . . . . . . . . . . . . . . . . P105,040 P308,400 P410,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . . ____ _? ____ _? _______-
Total estimated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ? P ? P410,000
Revenue* . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 105,040 - P 105,040
Costs/Expenses . . . . . . . . . . . . . . . . . . . . . . . _105,040 - _105,040
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0
* equivalent to costs incurred
Revenue* . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 303,400 P 105,040 P 198,360
Costs/Expenses . . . . . . . . . . . . . . . . . . . . . . . _303,400 _105,040 _198,360
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 0
Revenue (P450,000 x 100%) . . . . . . . . . . . . . P 450,000 P 303,400 P 146,600
Costs/Expenses (P410,000 x 100%) . . . . . . . _410,000 _303,400 _106,600
Gross Profit (P40,000 x 100%) . . . . . . . . . . . . P 40,000 P 0 P 40,000
Alternatively, the gross profit recognized each year may also be computed as follows:
20x3 20x4 20x5
Contract price:
Initial amount of contract . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P440,000 P440,000
Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______- __10,000 10,000
Total contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P450,000 P450,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . . . P105,040 P203,360 P101,600
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . . _______- _105,040 _308,400
Actual costs incurred to date . . . . . . . . . . . . . . . . . . . . . . . P105,040 P308,400 P410,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . . ____ _? ____ _? _______-
Total estimated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ? P ? P410,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 40,000
Percentage of completion . . . . . . . . . . . . . . . . . . . . . . . . . . _ -___ _ -___ ___100%
Gross profit to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 40,000
Less: Gross profit in prior years . . . . . . . . . . . . . . . . . . . . . . . . _______- _______- __ 0
Gross profit in current year . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 40,000
Following are the entries for the years 20x3 to 20x5:

20x3 20x4 20x5
1. To record costs incurred:
Construction In Progress* . . . . . . . . . . . 105,040 198,360 106,600
Materials Inventory . . . . . . . . . . . . . . . . 5,000 5,000
Cash, payables, etc . . . . . . . . . . . . 105,040 203,360 101,600
2. To record progress billings:
Accounts receivable . . . . . . . . . . . . . . 120,000 200,000 130,000
Progress billings* . . . . . . . . . . . . . . . 120,000 200,000 130,000
3. To record collections:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 190,000 160,000
Accounts receivable . . . . . . . . . . . 100,000 190,000 160,000
4. To recognize Revenue, Costs
and Gross Profit:
Construction in Progress* . . . . . . . . . .. 40,000
5. To close Construction In Progress**
and Progress Billings account:
Progress billings . . . . . . . . . . . . . . . . . . . 450,000
Construction In Progress . . . . . . . . . 450,000
* The term “Contract account” may alternatively be used
** If “Contract account” is used then no entry is required for No. 5.
As work progresses on the contract, the actual costs incurred are charged to inventory account
“Construction-In-Progress.” The amount of profit earned each period is charged to this asset account.
Thus, the inventory account is valued at its net realizable value – the sales (or contract) price less the cost
to complete the contract and less the unearned profit on the unfinished contract.
If a company projects a loss on the contract prior to completion, the full amount of the loss should be
recognized immediately. This loss recognition results in a write-down of the asset to its estimated net
realizable value. If only a percentage of the loss were recognized, the asset value would exceed the net
realizable value. This would violate the lower-of-cost-or-market rule.
Financial Statement Presentation: Point-in-Time/Cost Recovery Method/Zero-Profit Approach
During the life of the contract, the difference between the Construction In Progress and the Progress Billings is reported in the statement of financial position as follows:
• Current asset–Contract Asset. It comprises of total costs incurred on the contract, less progress billings (i.e., the amounts actually invoiced to customers for work performed
on a contract whether or not they have been paid by the customers).
• Current liability–Contract Liability. It comprises of progress billings less total costs incurred on the contract.
Using the data from the previous illustration, the DJD Builders would report the status and results of its long-term construction activities under the percentage of completion as
follows:
DJD Builders
Statement of Comprehensive Income (Income Statement)
20x3 20x4 20x5
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 105,040 P 198,360 P 146,600
Less: Costs / Expenses . . . . . . . . . . . . . . . . . . . . . . _105,040 _198,360 _106,600
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 40,000

Current Asset:
20x3 20x4 20x5
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 30,000 P -
Raw materials Inventory . . . . . . . . . . . . . . . . . . . . P 5,000
Current Liability:
Payables (“Payments on Account”)
Progress billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . P120,000 P320,000
Less: Construction In Progress . . . . . . . . . . . . . . . . _105,040 _303,400
Contract liability P 14,960 P 16,600
20x3 CI 105,040
120,000 20x3
Pr 0
End of x3 105,040 120,000 end of x3
20x4 CI 198,360 200,000 20x4
Pr 0
End of x4 303,400 320,000 end of x4
20x5 CI 106,600 130,000 20x5
Pr 40,000
450,000 450,000 450,000 450,000
Where: CI – cost incurred each year || Pr – profit

It should be observed that in the previous illustration, the point-in-time/cost recovery method (zero-profit
approach) involves recognizing revenues equal to the amount of costs incurred during the period so that no net
profit is recognized.
But as soon as the ultimate outcome of a contract can be estimated, the overtime/percentage-of-completion
is applied.
In the year in which the overtime/percentage-of-completion method is applied, the cumulative revenues and
costs recognized under the point-in-time/cost recovery method (zero-profit approach) are used in computing
the revenues and costs to be recognized for the current period.
Long-term Contract Losses
Two types of losses can become evident under the long-term contracts:
• Loss in Current Period on a Profitable Contract; and
• Loss on an Unprofitable Contract.
Profitable Contract - Loss in Current Period. This situation happens when, during the construction, there is a
significant increase in the estimated total contract costs but the increase does not eliminate all profits on the
contract.
Illustration 10-9: Profitable Contract – Loss in Current Period on a Profitable Contract
Assuming that VJD Construction was awarded a contract with a total price of P1,500,000. The construction will be completed over a
three-year period. The costs incurred and the estimated costs to complete, billings and collections for 20x3, 20x4 and 20x5 are as follows:
Year1 Costs Incurred Estimated costs to complete Billings
20x3 P520,000 P780,000 P500,000
20x4 455,100 417,900 450,000
20x5 417,900 -0- 550,000

20x3 20x4 20x5
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P1,500,000 P1,500,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 455,100 P 417,900
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . _________- __520,000 __975,100
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . P 520,000 P 975,100 P1,393,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . __780,000 __417,900 _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . P1,300,000 P1,393,000 P1,393,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000 P 107,000 P 107,000
Percentage of completion (1) / (3) . . . . . . . . . . . . . . . . 40% 70% 100%
The revenue, expenses (costs) and profit (loss) will be recognized in profit or loss as follows:
Revenue (P1,500,000 x 40%) . . . . . . . . . . . . . . . P 600,000 - P 600,000
Costs/Expenses (P1,300,000 x 40%) . . . . . . . . . __520,000 - __520,000
Gross Profit (P200,000 x 40%) . . . . . . . . . . . . . . . P 80,000 - P 80,000
Revenue (P1,500,000 x 70%). . . . . . . . . . . . . . . . P1,050,000 P 600,000 P 450,000
Costs/Expenses (P1,393,000 x 70%) . . . . . . . . . . __975,100 __520,000 _455,100
Gross Profit (P107,000 x 70%) . . . . . . . . . . . . . . . . P 74,900 P 80,000 P( 5,100)
Revenue (P1,500,000 x 100%). . . . . . . . . . . . . . . P1,500,000 P1,050,000 P 450,000
Costs/Expenses (P1,393,000 x 100%) . . . . . . . . . _1,393,000 __975,100 _417,900
Alternatively, the gross profit (loss recognized each year may also be computed as follows:
20x3 20x4 20x5
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P1,500,000 P1,500,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 455,100 P 417,900
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . . _________- __520,000 __975,100
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . . . P 520,000 P 975,100 P1,393,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . . __780,000 __417,900 _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,300,000 P1,393,000 P1,393,000
Estimated gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000 P 107,000 P 107,000
Percentage of completion . . . . . . . . . . . . . . . . . . . . . . . . . ______40% _ __70% _____100%
Gross profit (loss) to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 80,000 P 74,900 P 107,000
Less: Gross profit (loss) in prior years . . . . . . . . . . .. . . . . . . . . _________- __80,000 ____74,900
Gross profit (loss) in current year . . . . . . . . . . . . . . . . . . . . . . P 80,000 P( 5,100) P 32,100
Under the over-time/percentage-of-completion method, the estimated cost increase requires a current period adjustment of excess
gross profit of P80,000 in 20x4 recognized on the project in prior periods. This adjustment is recorded as a loss in the current period
because it is a change in accounting estimate.
The entries under the over-time/percentage-of-completion method to record revenue and cost for the three years, given the assumed
loss estimate in 20x4, would be as follows:
Construction Expenses . . . . . . . . . . . . 520.000 455,100 417,900
Construction in Progress . . . . . . . . . . . 80,000 5,100 32,100
20x3 CI 520,000
500,000 20x3
Pr 80,000
End of x3 600,000 200,000 end of x3
20x4 CI 455,100 5,100 loss 450,000 20x4
End of x4 1,050,000 950,000 end of x4
20x5 CI 417,900 550,000 20x5
Pr 32,100
1,500,000 1,500,000 1,500,000 1,500,000
Where: CI – cost incurred each year || Pr – profit

On the other hand, under the cost recovery method, no loss is recognized in 20x4 because the contract is still
expected to result in a profit to be recognized in the year of completion. The revenue, expenses (costs) and profit will
be recognized in profit or loss as follows:
Revenue. . . . . . . . . . . . . . . . P 520,000 - *P 520,000
Costs/Expenses. . . . . . . . . . __520,000 - __520,000
Gross Profit. . . . . . . . . . . . . . . . P 0 - P 0
Recognized Recognized in
20x4 To date in prior years current year
Revenue . . . . . . . . . . . . . . . P 975,100 P 520,000 *P 455,100
Costs/Expenses . . . . . . . . . . __975,100 __520,000 _455,100
Gross Profit . . . . . . . . . . . . . . . P 0 P 0 P 0
Revenue (P1,500,000 x 100%). . . . . . . . . . . . . . . P1,500,000 P 975,100 *P 524,900
Costs/Expenses (P1,393,000 x 100%) . . . . . . . . . _1,393,000 __975,100 _417,900
Gross Profit (P107,000 x 100%) . . . . . . . . . . . . . . P 107,000 P 0 P 107,000
* equivalent to costs incurred or P1,500,000 – P520,000 – P455,100 = P650,000
Alternatively, the gross profit (loss recognized each year may also be computed as follows:
20x3 20x4 20x5
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 455,100 P 417,900
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . . _________- __520,000 __975,100
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . . . P 520,000 P 975,100 P1,393,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . . ____ _? ____ _? _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ? P ? P1,393,000
Estimated gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 107,000
Percentage of completion . . . . . . . . . . . . . . . . . . . . . . . . . _ -___ _ -___ _____100%
Gross profit (loss) to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 107,000
Less: Gross profit (loss) in prior years . . . . . . . . . . .. . . . . . . . . _______- _______- ____ 0
Gross profit (loss) in current year . . . . . . . . . . . . . . . . . . . . . . P 0 P 0 P 107,000
The entries under the cost recovery method to record revenue and cost for the three years, given the assumed loss estimate in 20x4,
would be as follows:
Construction in Progress . . . . . . . . . . . 107,000
The construction-in-progress progress billings account follows:

20x3 CI 520,000
500,000 20x3
Pr 0
End of x3 520,000 500,000 end of x3
20x4 CI 455,100 450,000 20x4
Pr 0
End of x4 975,100 950,000 end of x4
20x5 CI 417,900 550,000 20x5
Pr 107,000
1,500,000 1,500,000 1,500,000 1,500,000
where: CI - cost incurred each year || Pr – profit
Unprofitable Contract – Anticipated Contract Losses. This condition arises when the estimates at the end of the
current period may indicate that a loss will result on completion of the entire contract. The loss will be the
amount by which total estimated contract revenue is exceeded by total estimated contract costs.
The loss amount is not affected by whether or not work has started on the contract, the stage of completion of
the work or profits on other contracts (unless they are related contracts treated as a single contract). When a
loss on the total contract is anticipated, GAAP requires reporting the loss in its entirety in the period when the
loss is first anticipated. This is true under either the percentage-of-completion method or the cost-recovery
method
Illustration 10-10: Unprofitable Contract – Anticipated Contract Losses
Assuming the same data in the previous example for VJD Construction except that the estimated costs to complete the contract at the
end of 20x4 was P650,000. The costs incurred estimated costs to complete, billings and collections for 20x3, 20x4 and 20x5 are as follows:
Year Costs Incurred Estimated costs to complete Billings
20x3 P520,000 P780,000 P500,000
20x4 455,000 650,000 450,000
20x5 700,000 -0- 550,000
20x3 20x4 20x5
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P1,500,000 P1,500,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . P 520,000 P 455,000 P 700,000
Add: Costs incurred in prior years . . . . . . . . . . . . _________- __520,000 __975,000
Actual costs incurred to date (1) . . . . . . . . . . . . . P 520,000 P 975,000 P1,675,000
Add: Estimated costs to complete . . . . . . . . . . . __780,000 __650,000 _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . P1,300,000 P1,625,000 P1,675,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . P 200,000 P( 125,000) P (175,000)
Percentage of completion (1) / (3) . . . . . . . . . . . 40% 60% 100%
Revenue (P1,500,000 x 40%) . . . . . . . . . . . . . . . P 600,000 - P 600,000
Costs/Expenses (P1,300,000 x 40%) . . . . . . . . . . __520,000 - __520,000
Gross Profit (P200,000 x 40%) . . . . . . . . . . . . . . . P 80,000 - P 80,000
Revenue (P1,500,000 x 60%) . . . . . . . . . . . . . . . P 900,000 P 600,000 P 300,000
Costs/Expenses* . . . . . . . . . . . . . . . . . . . . . . . . _1,025,000 __520,000 ___505,000
Gross Profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . P( 125,000) P 80,000 P(205,000)
* recognized revenue plus anticipated loss
Revenue (P1,500,000 x 100%) . . . . . . . . . . . . . . P1,500,000 P 900,000 P 600,000
Costs/Expenses* . . . . . . . . . . . . . . . . . . . . . . . . . _1,675,000 _1,025,000 ___650,000
Gross Profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . P (175,000) P( 125,000) P( 50,000)
* recognized revenue plus anticipated loss
Alternatively, the gross profit (loss) recognized each year may also be computed as follows:
20x3 20x4 20x5
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 455,000 P 700,000
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . .. _________- __520,000 __975,000
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . P 520,000 P 975,000 P1,675,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . __780,000 __650,000 _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . P1,300,000 P1,625,000 P1,675,000
Estimated gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000 P( 125,000) P (175,000)
Percentage of completion . . . . . . . . . . . . . . . . . . . . . . . . . _ __ 40% _ 100% ___100%
Gross profit (loss) to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 80,000 P( 125,000) P (175,000)
Less: Gross profit (loss) in prior years . . . . . . . . . . .. . . . . . . . . _________- __ 80,000 _( 125,000)
Gross profit (loss) in current year . . . . . . . . . . . . . . . . . . . . . . P 80,000 P( 205,000) P( 50,000)
Under the overtime/percentage-of-completion method, P80,000 of gross profit was recognized in 20x4. This P80,000 must be offset in 20x4 because it is no
longer expected to be realized.
To compute the construction costs to be expensed in 20x4 we add the total loss to be recognized in 20x4 (P450,000 + P205,000) to the revenue to be
recognized in 20x4 and the same procedure will be followed for 20x5.
The entries under the percentage-of-completion method to record revenue and cost for the three years, given the anticipated loss in 20x4 and 20x5, would
be as follows:
Construction Expenses . . . . . . . . . . . . . 520.000 505,000 650,000
Construction in Progress . . . . . . . . . . . . 80,000 205,000 50,000
Revenue from Construction . . . . . . 600,000 300,000 600,000
20x3 CI 520,000
500,000 20x3
Pr 80,000
End of x3 600,000 500,000 end of x3
20x4 CI 455,100 450,000 20x4
205,000 loss
End of x4 850,000 950,000 end of x4
20x5 CI 700,000 550,000 20x5
50,000 loss
1,500,000 1,500,000 1,500,000 1,500,000

On the other hand, the entries under the point-in-time/cost recovery method to record revenue and cost for the three
years, given the anticipated loss in 20x4 and 20x5, would be as follows:
Construction in Progress . . . . . . . . . . . 125,000 50,000
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 - *P 520,000
Costs/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __520,000 - __520,000
Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 - P 0
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *P 850,000 P 520,000 *P 330,000
Costs/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __975,000 __520,000 ___455,000
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . P(125,000) P 0 P(125,000)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P 850,000 *P 650,000
Costs/Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _1,675,000 __975,000 __700,000
Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P(175,000) P(125,000) P( 50,000)
* equivalent to costs incurred less anticipated loss or P1,500,000 – P520,000 – P330,000 = P650,000
Alternatively, the gross profit (loss) recognized each year may also be computed as follows:
20x3 20x4 20x5
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P1,500,000 P1,500,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 455,000 P 700,000
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . . . . . . . _________- __520,000 __975,000
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 975,000 P1,675,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . . . . . . . _ _? __650,000 _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ? P1,625,000 P1,675,000
Estimated gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P( 125,000) P (175,000)
Percentage of completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _________ _ 100% ___100%
Gross profit (loss) to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P( 125,000) P (175,000)
Less: Gross profit (loss) in prior years . . . . . . . . . . .. . . . . . . . . . . . _________- _______0- _( 125,000)
Gross profit (loss) in current year . . . . . . . . . . . . . . . . . . . . . . . . . P 0 P( 125,000) P( 50,000)
The construction-in-progress/progress billings account is as follows:

20x3 CI 520,000 500,000 20x3
Pr 0
End of x3 520,000 500,000 end of x3
20x4 CI 455,000 125,000 loss 450,000 20x4
End of x4 850,000 950,000 end of x4
20x5 CI 700,000 50,000 loss 550,000 20x5
1,500,000 1,500,000 1,500,000 1,500,000
It should be observed that in case of anticipated contract losses, the construction-in-progress account under both methods would be the same.
Over-Time/Percentage-of-Completion Method: Output Measures – Architects or Engineers Estimates
If the input measure cost-to-cost method is not used to measure progress on the contract, the proportional costs recognized under this method may not be
equal to the actual costs incurred.
Illustration 10-11: Output Measures – Engineers’ Estimates

Assuming the same in the previous example for VJD Construction (under the Profitable Contract – Loss in Current Period) except that based on the estimation
of engineers the percentage-of-completion for 20x3 and 20x4 are 42% and 73%, respectively. The following analysis is to determine the percentage of
completion:
20x3 20x4 20x5
Contract price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P1,500,000 P1,500,000
Costs incurred each year . . . . . . . . . . . . . . . . . . . . . . . . . P 520,000 P 455,100 P 417,900
Add: Costs incurred in prior years . . . . . . . . . . . . . . . . . . _________- __520,000 __975,100
Actual costs incurred to date (1) . . . . . . . . . . . . . . . . . . . P 520,000 P 975,100 P1,393,000
Add: Estimated costs to complete . . . . . . . . . . . . . . . . . __780,000 __417,900 _________-
Total estimated costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . P1,300,000 P1,393,000 P1,393,000
Estimated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000 P 107,000 P 107,000
Percentage of completion (1) / (3) –
cost-to-cost method . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 70% 100%
Percentage, of completion - engineers ‘ estimate. . . . . 42% 73% 100%
The revenue, expenses (costs) and profit under the output measures will be recognized in profit or loss under the following alternatives:
Alternative 1: Proportional Cost Approach – measure of completion to be applied to revenues and costs.
Recognized in Recognized in current
20x3 To date prior years year
Revenue (P1,500,000 x 42%) . . . . . . . . . . . . . . . . P 630,000 - P 630,000
Costs/Expenses (P1,300,000 x 42%) . . . . . . . . . . __546,000 - __546,000
Gross Profit (P200,000 x 42%) . . . . . . . . . . . . . . . . P 84,000 - P 84,000

Revenue (P1,500,000 x 73%) . . . . . . . . . . . . . . . . P1,095,000 P 630,000 P 465,000
Costs/Expenses (P1,393,000 x 73%) . . . . . . . . . . 1,016,890 __546,000 _470,890
Gross Profit (P107,000 x 73%) . . . . . . . . . . . . . . . . P 78,110 P 84,000 P( 5,890)

Revenue (P1,500,000 x 100%) . . . . . . . . . . . . . . . P1,500,000 P1,095,000 P 405,000
Costs/Expenses (P1,393,000 x 100%) . . . . . . . . . _1,393,000 1,016,890 _376,110
Because some accountants believe that the amount of cost recognized should be equal to the costs actually
incurred, an alternative to the preceding approach was included in SOP (Statement of Position, US) 81-1.
Under this actual cost approach as illustrated below, revenue is defined as the actual cost incurred on the contract
plus the gross profit recognized for the period. Using the same data, the revenue and costs to be reported are as
follows:
Alternative 2: Actual Cost Approach – measure of completion to be applied to gross profit.

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 604,000 - P 604,000
Costs/Expenses (actual costs) . . . . . . . . . . __520,000 - __520,000
Gross Profit (P200,000 x 42%) . . . . . . . . . . . . P 84,000 - P 84,000

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,053,210 P 604,000 P 449,210
Costs/Expenses (actual costs) . . . . . . . . . . . . __975,100 __520,000 _455,100
Gross Profit (P107,000 x 73%) . . . . . . . . . . . . P 78,110 P 84,000 P( 5,890)

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,500,000 P1,053,210 P 446,790
Costs/Expenses (actual costs) . . . . . . . . . . . . _1,393,000 __975,100 _417,900
Gross Profit (P107,000 x 100%) . . . . . . . . . . P 107,000 P 78,110 P 28,890
Both alternatives report the same gross profit for the entire contract duration. Another version of the actual cost
approach as illustrated below, measures the gross profit earned as the percentage-of-completion based on contract
price less the actual costs incurred on the contract. The revenue, costs and profit are as follows:
Alternative 3: Actual Cost Approach – measure of completion to be applied to revenues

Revenue (P1,500,000 x 42%) . . . . . . . . . . . . . . P 630,000 - P 630,000
Costs/Expenses (actual costs) . . . . . . . . . . . . __520,000 - __520,000
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . P 110,000 - P 110,000
Revenue (P1,500,000 x 73%) . . . . . . . . . . . . . . P1,095,000 P 630,000 P 465,000
Costs/Expenses (actual costs) . . . . . . . . . . . . __975,100 __520,000 _455,100
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 119,900 P 110,000 P 9,900
Revenue (P1,500,000 x 100%) . . . . . . . . . . . . . P1,500,000 P1,095,000 P 405,000
Costs/Expenses (actual costs) . . . . . . . . . . . . _1,393,000 __975,100 _417,900
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 107,000 P 119,900 P( 12,900)
In a footnote to this discussion to the SOP, the committee made it clear that the actual cost approach and the
proportional cost approach are equally acceptable. However, because the actual cost approach results in a varying
gross profit percentage from period to period whenever the measurement of completion differs from that which would
occur if the cost-to-cost method were used, the proportional cost approach seems to be consistent in its application
as to recognition of revenue, costs and gross profit.
In view of the foregoing, the author prefers to emphasize the usefulness and effectiveness of Alternative 3 in which it
presents comprehensively the real intention and wisdom of SOP legislators through their illustrative examples
General and Administrative Expenses
Under the percentage-of-completion and cost recovery method, the general and administrative expenses are charged to
income in the period when they occur.
Contract Retention
To guarantee the completion of the contract in a satisfactory manner, part of the billings may be withheld until the project is
completed and accepted to conform to the acceptable standards.
Illustration 10-12: Contract Retention
Assume that a contract billings amounted to P500,000 and part of the agreement is that a 10% is withheld upon collection. The
entry to record the above billings and collections respectively is as follows:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Progress billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000
Contract Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
The contract retention account is presented in the Statement of Financial Position (Balance Sheet) as a current asset.
Once completed, the balance of this account will be collected from the customer by debiting Cash and crediting the
Contract Retention account.
It should be observed that contract retention does not affect the revenue, costs and gross profit accounts.

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Revenue Recognition:

Contracts with Customer – Long Term

Types of Construction Contract

Variations in Contract Work:

A claim may arise from, for example:

The result is that the construction revenue is measurable at fair value.

PFRS (IFRS) 15 states that the following cost must be capitalized:

Therefore, construction costs should comprise of:

Costs that relate directly to a specific contract include the following:

1. General administration costs (unless reimbursement is specified in the contract);

Example 6 – Non-Proportionate Costs

DJD Builders will recognize revenue as follows:

Total revenue recognized is P1,600,000 with costs recognized of P1,400,000.

Example 8 – Recognition of Contract Costs

Illustration 10-2: Fixed-price Contract Price

Illustration 10-3: Cost-plus Contract Price

Measuring the Percentage-of-Completion (Over-Time)

Note that the percentage of completion is computed as follows:

Cost incurred to date

(1) (2) (3) (4)

Thus, the application of percentage-of-completion is as follows:

* including the P6,000 additional costs in 20x4

Revenue (P450,000 x 100%) . . . . . . . . . . . . . . . . P 450,000 P 333,000 P 117,000

Following are the entries for the years 20x3 to 20x5:

* The term “Contract account” may alternatively be used.

The following should be noted in the statement of comprehensive income:

Construction in Progress Progress Billing

Where: CI – cost incurred each year

The following analysis is to determine the percentage of completion:

Alternatively, the gross profit may also be computed as follows:

Current Asset 20x5

Current Asset 20x5

Following are the entries for the years 20x3 to 20x5:

Balance Sheet/Statement of Financial Position

Construction in Progress Progress Billing

End of x3 105,040 120,000 end of x3

20x4 CI 198,360 200,000 20x4

End of x4 303,400 320,000 end of x4

20x5 CI 106,600 130,000 20x5

450,000 450,000 450,000 450,000

Where: CI – cost incurred each year || Pr – profit

Long-term Contract Losses

The following analysis is to determine the percentage of completion:

Construction in Progress Progress Billing

End of x3 600,000 200,000 end of x3

20x4 CI 455,100 5,100 loss 450,000 20x4

End of x4 1,050,000 950,000 end of x4

20x5 CI 417,900 550,000 20x5

1,500,000 1,500,000 1,500,000 1,500,000

Where: CI – cost incurred each year || Pr – profit

The construction-in-progress progress billings account follows:

where: CI - cost incurred each year || Pr – profit

The construction-in-progress/progress billings account is as follows:

Construction in Progress Progress Billing

where: CI - cost incurred each year || Pr – profit

Illustration 10-11: Output Measures – Engineers’ Estimates

Recognized in Recognized in current

Recognized in Recognized in current

Alternative 2: Actual Cost Approach – measure of completion to be applied to gross profit.