percentageofcompletion

The percentage of completion method is an accounting technique used to recognize revenue and expenses for long-term projects over the life of the project, rather than when the project is fully completed. This method is particularly relevant for industries like construction, software development, and long-term service contracts where projects span multiple accounting periods.

The core principle of the percentage of completion method is to match revenue and expenses to the period in which the work is performed. This provides a more accurate reflection of a company's financial performance and position during the project's duration compared to the completed contract method, which defers all revenue and expenses until the project is finished.

To apply the percentage of completion method, companies must be able to reliably estimate the total costs and the progress towards completion of the project. Common methods for measuring progress include the cost-to-cost method, where the percentage of completion is calculated by dividing the costs incurred to date by the total estimated costs. Another method is the units-of-delivery method, which measures progress based on the number of units delivered or milestones achieved.

When applying this method, revenue recognized in a period is equal to the estimated total project revenue multiplied by the percentage of completion for that period, minus the revenue recognized in prior periods. Similarly, expenses are recognized as they are incurred, and the total project costs are estimated and updated periodically. If at any point the estimated total costs for the project increase, the company must revise its revenue and expense recognition for the current and future periods. This method requires significant judgment and reliable estimation capabilities.