Lesson 30 - Intermediate Accounting Course 

30. Percentage-of-Completion vs. Completed-Contract Methods

When businesses undertake long-term projects, such as construction or large-scale manufacturing contracts, they must choose an appropriate method for recognizing revenue. The two most commonly used accounting methods for these projects are the Percentage-of-Completion Method and the Completed-Contract Method. Selecting the right method can significantly impact financial statements, tax obligations, and cash flow management.

1️⃣ Why Are These Methods Important?

Projects that last multiple accounting periods require a structured way to recognize revenue and expenses. If revenue is not properly matched with costs, financial statements may be misleading.

Key Considerations:

✔ Long-term contracts require gradual revenue recognition (Percentage-of-Completion) or deferred recognition until completion (Completed-Contract).
✔ Revenue recognition affects a company’s net income, tax liabilities, and financial stability.
✔ Certain accounting standards (e.g., IFRS 15 and ASC 606) provide rules for recognizing revenue over time or at a point in time.

2️⃣ Percentage-of-Completion Method (PoC)

The Percentage-of-Completion (PoC) Method allows businesses to recognize revenue gradually, based on the proportion of work completed. This method is most commonly used in construction contracts, software development, and large infrastructure projects.

How It Works:

✔ Revenue is recognized as work progresses, rather than waiting until the project is completed.
✔ Expenses are matched with the portion of revenue recognized.
✔ The percentage of completion can be measured using costs incurred, work hours, or milestones.

Formula for Recognizing Revenue:

Example:

A construction company signs a $1,000,000 contract to build an office complex. The total estimated cost of the project is $800,000. At the end of Year 1, the company has incurred $400,000 in costs.

Using the formula:

💡 $500,000 in revenue is recognized in Year 1.

3️⃣ Completed-Contract Method (CCM)

The Completed-Contract Method (CCM) recognizes revenue and expenses only when the project is fully completed. This method is more conservative but can lead to volatile financial results, as all revenue is recognized at once.

How It Works:

✔ No revenue or expenses are recorded until the project is 100% complete.
✔ All costs incurred are accumulated as work-in-progress (WIP) on the balance sheet.
✔ Once completed, the entire revenue and cost are recognized in the same period.

Example:

Using the same $1,000,000 contract example, under CCM, no revenue is recognized in Year 1. All revenue and expenses are recorded only in the year the project is completed.

If the project is completed in Year 2, the company would recognize:

• $1,000,000 revenue
  
  

• $800,000 expenses
  
  

• $200,000 profit (all in Year 2)

4️⃣ Key Differences Between PoC and CCM 

5️⃣ When to Use Each Method

✅ Use Percentage-of-Completion When:

✔ The contract extends over multiple accounting periods.
✔ The company can accurately estimate project costs and completion percentage.
✔ The contract terms allow for regular billing or payments based on milestones.
✔ The industry follows accounting standards requiring revenue recognition over time (e.g., IFRS 15, ASC 606).

✅ Use Completed-Contract When:

✔ The project duration is short-term (usually <1 year).
✔ Cost estimates are uncertain, making revenue recognition unreliable.
✔ There is a high risk of contract cancellation or major changes.
✔ The company prefers tax deferral strategies by postponing income recognition.

6️⃣ Impact on Financial Statements

📊 Balance Sheet:

• PoC Method: Recognizes accounts receivable and work-in-progress assets over time.
  
  

• CCM Method: Work-in-progress accumulates as an asset until completion.
  
  

📈 Income Statement:

• PoC Method: Recognizes gradual revenue, leading to smoother earnings.
  
  

• CCM Method: Revenue is lumpy, which can make profitability inconsistent across periods.
  
  

🏦 Tax Implications:

• PoC Method: Taxable income is recognized over multiple periods.
  
  

• CCM Method: Taxable income is deferred, which may provide short-term cash flow benefits.

7️⃣ Accounting Standards and Regulations

Different accounting frameworks provide guidelines on when each method is acceptable:

• IFRS 15 (Revenue from Contracts with Customers) favors the Percentage-of-Completion method when a contract is performance-based.
  
  

• ASC 606 (U.S. GAAP) also supports PoC when revenue can be recognized over time.
  
  

• IRS (U.S. Tax Code) often requires CCM for small businesses and certain contracts unless specified otherwise.

8️⃣ Summary & Key Takeaways

✔ The Percentage-of-Completion method is ideal for long-term projects where revenue and expenses should be recognized gradually.
✔ The Completed-Contract method is more conservative, delaying revenue recognition until project completion.
✔ PoC provides smoother earnings and better financial predictability, while CCM can defer taxes but lead to volatile profits.
✔ Companies must choose the appropriate method based on contract terms, cost estimation reliability, and tax strategy.

Understanding these revenue recognition methods is crucial for businesses involved in construction, manufacturing, and large-scale service contracts. Choosing the right method can impact financial reporting, tax obligations, and cash flow management.