The percentage-of-completion method recognizes revenue progressively as performance obligations are satisfied, rather than waiting until contract completion. Guidance in ASC 606 comes from FASB Staff, Financial Accounting Standards Board and in IFRS 15 from IFRS Foundation, International Accounting Standards Board. Both frameworks require companies to determine whether transfer of control occurs over time and to measure progress toward completion with reliable inputs. This approach aligns reported revenue with economic activity and provides users with more timely information, but it depends heavily on management judgment and robust estimation.
Criteria for recognizing revenue over time
Revenue may be recognized over time when one of several conditions is met: the customer simultaneously receives and consumes the benefits as the entity performs; the customer controls the asset as it is created; or the entity has an enforceable right to payment for performance completed to date with no alternative use of the asset. These tests, explained by FASB Staff, Financial Accounting Standards Board, require companies to document contract terms, legal rights, and the pattern of transfer. Failure to meet these criteria means revenue must be recognized at a point in time, which materially changes timing and profitability reporting.
Measuring progress and accounting considerations
Measurement typically uses an input method such as the cost-to-cost method, where progress equals costs incurred divided by total expected costs, or an output method based on milestones or units delivered. Revenue recognized equals the percentage of completion multiplied by total contract revenue; changes in estimates require prospective adjustment. The entity records a contract asset when recognized revenue exceeds billings and a contract liability when billings exceed recognized revenue. Companies must also assess for impairment of contract assets and disclose significant judgments, performance obligations, and variability in revenue recognition per IFRS Foundation, International Accounting Standards Board.
In practice, construction, infrastructure, and defense contracts illustrate cultural and territorial nuances: retainage provisions, local lien laws, and political risk affect enforceable payment rights and cost estimates, especially in emerging markets where supply-chain disruptions and environmental remediation increase uncertainty. Auditors and boards should ensure strong internal controls, transparent documentation, and independent review of estimates because misstatement risk concentrates in long-duration contracts. Following authoritative guidance and disclosing the nature and sensitivity of estimates helps stakeholders evaluate the quality of reported revenue.