Crash Course in Accounting and Financial Statement Analysis, Second Edition

Revenue Recognition: Long-Term Projects

For long-term projects, companies have some flexibility with respect to revenue recognition:

• Percentage of completion method. Revenues are recognized on the basis of the percentage of total work completed during the accounting period.

• Completed contract method. Rarely used in the United States and prohibited by the International Financial Reporting Standards (IFRS), this method allows revenue recognition only once the entire project has been completed.

Basic Principles Revisited: Accrual Basis of Accounting and Revenue Recognition Recall that the accrual basis of accounting dictates that revenues must be recorded only when they are earned and measurable. According to the revenue recognition principle, a company cannot record revenue until it is earned—that is, until that order is shipped to a customer and collection from that customer, who used a credit card, is reasonably assured.

2. Boeing

Exercise Q1: On January 12, 2005, Boeing agreed to deliver six Boeing airplanes to Bavaria Aircraft Leasing for $330 million. Delivery of the airplanes begins in 2005 and extends through 2007. Boeing is paid upon delivery of each plane. Assuming Boeing uses the percentage of completion method, when should Boeing recognize $330 million of revenues? On January 12, 2005—announcement date of this contract Sometime during the 2005–2007 period—as it delivers ...