Revenue Recognition Under FRS102 – Part 3 Construction Contracts

The accounting treatment of the construction contract will depend on the extent to which the performance of the contract can be estimated.

1. The outcome of the construction contract can be reliably estimated

If the outcome of the construction contract can be reliably estimated, the entity should recognise contract revenue and expenses associated with the construction contract as revenue and expenses by reference to the percentage of completion method at the end of the reporting period.

The percentage of completion method requires management to employ a method of estimating how much of a contract has been completed at the end of the reporting period. The most common methods include;

  • The proportion of costs incurred to date compared to the estimated total costs (excluding costs incurred for future activities).
  • Surveyors estimates.
  • Completion of physical proportion of the contract work

Where the entity receives advance payments for work not yet performed then this should be adjusted for when calculating the percentage of work completed.

2. The outcome of the construction contract cannot be estimated reliably

If the outcome of the construction contract cannot be estimated reliably then the entity should recognise revenue only to the extent of contract costs incurred that it is probable will be recovered. The entity should recognise contract costs as an expense in the period in which they are incurred.

If it is probable that the construction contract will make a loss then the expected loss should be recognised immediately as an expense with a corresponding provision for an onerous contract. If an amount previously recognised as revenue is no longer payable then this should be recognised as an expense rather than as an adjustment to revenue.

The following disclosures are required in relation to construction contracts.

  • The amount of contract revenue recognised as revenue in the period.
  • The methods used to determine the contract revenue recognised in the period; and
  • The methods used to determine the stage of completion of contracts in progress.

In addition, the entity should present amounts due from customers for contract work and amounts due to customers for contract work separately as assets and liabilities respectively.

What questions do you have?

We are happy to help. Please post your comment below or contact Michael O’Halloran, Assistant Audit Manager on 01 677 9000 or mohalloran@cooneycarey.ie.

If you found this article interesting, please share it with other businesses. 

Posted on January 31, 2018 by Michael O'Halloran

Revenue Recognition Under FRS102 – Part 2 Rendering of Services

Where the outcome of a transaction involving the rendering of services can be estimated reliably, the entity should recognise the revenue associated with the transaction by reference to the percentage of completion of the transaction at the end of the reporting period (discussed later).

The outcome of a transaction can be reliably estimated when all of the following conditions are satisfied;

  • The amount of revenue can be measured reliably.
  • It is probable that the economic benefits of the transaction will flow to the entity.
  • The stage of completion of the transaction at the end of the reporting period can be measured reliably
  • The costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

If the service provided involves an as yet undetermined number of acts over a specified period of time then the entity should recognise the revenue on a straight line basis over the period unless there is evidence to suggest that there is another method which better represents the stage of completion. Where a specific act is much more significant than any other act, the entity postpones recognition of revenue until the act is executed.

Where the outcome of the transaction involving the rendering of services cannot be estimated reliably, an entity should recognise revenue only to the extent of the expenses that can be recovered.

What questions do you have?

We are happy to help. Please post your comment below or contact Michael O’Halloran, Assistant Audit Manager on 01 677 9000 or mohalloran@cooneycarey.ie.

If you found this article interesting, please share it with other businesses. 

Posted on January 25, 2018 by Michael O'Halloran

Revenue Recognition Under FRS102 – Part 1 Sale of Goods

Section 23 of FRS102 sets out the standard to be followed when recognising income.

An entity should measure revenue at the fair value of the consideration received or receivable. When payment is deferred and the arrangement is a financing transaction then the present value of future receipts should be applied using an appropriate discount rate.

Sale of Goods

An entity should recognise revenue from the sale of goods when the following conditions are satisfied;

  • The entity has transferred the significant risks and rewards of ownership of the goods to the buyer (in most cases, this will result when cash changes hands in exchange for the goods).
  • The entity no longer has continuing managerial involvement to the degree usually associated with ownership.
  • It is probable that economic benefits associated with the transaction will flow to the entity; and
  • The costs incurred or to be incurred in relation to the transaction can be measured reliably.

FRS102 recognises some specific scenarios where revenue should not be recognised;

  • Where the entity retains an obligation for unsatisfactory performance not covered by normal warranties.
  • Where the sale is contingent on another sale happening.
  • Where goods are shipped subject to installation (where installation is a significant part of the sale)
  • Where the buyer has the right to rescind the sale and the entity is uncertain about the probability of this happening.

Despite the above, a sale is still recognised in circumstances where the entity retains title of the goods to protect collectability or where the goods are subject to warranty claims and the entity can estimate the provision reliably.

What questions do you have?

We are happy to help. Please post your comment below or contact Michael O’Halloran, Assistant Audit Manager on 01 677 9000 or mohalloran@cooneycarey.ie.

If you found this article interesting, please share it with other businesses. 

Posted on January 23, 2018 by Michael O'Halloran

Newer Posts →

← Older Posts