Accounting Standard for Construction Contracts

Under the PERCENTAGE-OF-COMPLETION method, REVENUE and COSTS are recognised in PROPORTION to the contract's progress toward completion – most commonly measured using the "COST-TO-COST" method (costs incurred TO DATE divided by TOTAL estimated contract costs) – PROVIDED the OUTCOME of the contract can be estimated RELIABLY (total contract revenue, costs, and stage of completion can all be measured with reasonable CONFIDENCE).

The CHOICE between the two methods is NOT a free ACCOUNTING POLICY election – it depends DIRECTLY on whether the contract's outcome can be estimated RELIABLY. Where reliable estimation IS possible, the percentage-of-completion method is generally PREFERRED, as it provides a more FAITHFUL, TIMELY representation of the entity's ECONOMIC performance as work progresses.

Since ASBJ Statement No. 29, Accounting Standard for Revenue Recognition, came into effect, construction contract revenue is now GENERALLY analysed under the GENERAL revenue recognition model – determining whether a performance obligation is satisfied OVER TIME or at a POINT IN TIME, based on criteria broadly SIMILAR to IFRS 15's own framework – rather than under THIS Statement's separately-named percentage-of-completion/completed-contract terminology. In PRACTICE, the SUBSTANTIVE OUTCOME for most construction contracts is broadly SIMILAR under both frameworks (progressive revenue recognition where the customer receives and consumes benefits as work progresses), but the ANALYTICAL FRAMEWORK and terminology used has shifted to the GENERAL revenue standard, PARALLELING how IAS 11 (Construction Contracts) was INTERNATIONALLY WITHDRAWN and folded into IFRS 15 when THAT standard was introduced.