Long‐term construction contract revenue is recognizable over time as construction progresses rather than at the completion of the contract. This “as earned” approach to revenue recognition is justified because under most long‐term construction contracts both the buyer and the seller (contractor) obtain legally enforceable rights. The buyer has the legal right to require specific performance from the contractor and, in effect, has an ownership claim to the contractor's work in progress. The contractor, under most long‐term contracts, has the right to require the buyer to make progress payments during the construction period. The substance of this business activity is that revenue is earned continuously as the work progresses.
ARB 45 describes the two generally accepted methods of accounting for long‐term construction contracts.
The percentage‐of‐completion method recognizes income as work on a contract (or group of closely related contracts) progresses. The recognition of revenues and profits is generally related to costs incurred in providing the services required under the contract.
Under this method, work‐in‐progress (WIP) is accumulated in the accounting records. At any point in time if the cumulative billings to date under the contract exceed the amount of the WIP plus the portion of the contract's estimated gross profit attributable to that WIP, then the contractor recognizes a current ...