Moneyzine
Contents
/Investment Guides /Percentage-of-Completion Method

Percentage-of-Completion Method

Moneyzine Editor
Author: 
Moneyzine Editor
3 mins
September 20th, 2023
Advertiser Disclosure

Definition

The term percentage-of-completion method refers to an accounting approach that recognizes revenues and costs associated with long-term projects. The percentage-of-completion method allows companies to record revenues as progress is made toward completion of the project. A cost-to-cost calculation is typically used as the basis for determining the completion percentage.

Calculation

Using a cost-to-cost method, the following calculation is used to determine the completion percentage:

Percent Complete = Cost Incurred to Date / Total Cost Estimate

The current period revenue to be recognized during production would then be:

Current Period Revenue = (Percent Complete x Total Contract Revenue) - Revenue Recognized in Prior Periods

Explanation

The FASB Concept Statement No. 5 states that companies cannot recognize revenues as being earned until they are realized or realizable, and the company has substantially completed what it needs to do in order to be entitled to payment. Revenue can be recognized at the point of sale, before, and after delivery, or as part of a special sales transaction.

Long-term projects oftentimes require the buyer to make payments as certain milestones are reached. This is a common arrangement in the construction and other heavy equipment industries that might involve customized projects or products that can take years to complete or build.

The percentage-of-completion method recognizes revenues and costs each accounting period as the project progresses. Companies that use this method believe that waiting until a project is complete before recognizing the potential revenues associated with the project misaligns costs and revenues. The biggest hurdle to this approach is the ability to accurately determine the percentage of a long-term project that is complete.

The cost-to-cost method is one of the more popular approaches to solving this problem. This method first determines the percentage of the project that is complete using a ratio of the costs incurred to date to the total project costs. This value is then applied to the total revenue associated with the project.

Example

Company A has contracted with Company Z to upgrade their customer information system. The total value of the contract with Company Z is worth $22 million, and the project is expected to take three years to complete. Company Z's internal estimate indicates the project will cost $15 million to complete. The first milestone payment from Company A does not occur until nine months into the project, but Company Z would like to recognize revenue on their income statement in their next annual report. At that point in time, Company Z would have expended $5 million in costs.

Using the percentage-of-completion method, the percentage complete would be:

= $5 million / $15 million, or 33% complete

The current period revenue would then be calculated as:

= 33% x $22 million = $7.26 million

Note: Since this is the initial determination of revenue, there is no need to adjust this value for prior periods.

Related Terms

revenues, revenue recognition principle, revenue recognition: before delivery, revenue recognition: point of sale, revenue recognition: during production, completed-contract method

Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    November 15th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024
  • How to Invest $100 and Grow it to 6 Figures
    Turning $100 into six figures is a goal no one should realistically have. But it's the question you might ask yourself: Can it be done? Sure. Probable? It's less probable than winning the lottery, but technically still probable - like finding a needle in a haystack the size of Canada. But possible? Absolutely.
    October 29th, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.