Could someone give a description of the different contract Methods under GAAP/IFRS? I know a few of them are Completed Contract, % of completion and the installment method but when do you use each one and how is revenue, expenses and profit impacted? Thanks a ton in advance!
After doing some reading let me give a shot answering my own question.
GAAP uses the following methods:
% of completion (when costs can be determined)
Revenue = (costs incurred / total costs) * total revenue.
Profit = Revenue per period - costs per period
Completed Contract used when outcome cannot be measured reliably.
Revenue is 0 until the contract is completed and thus 0 profits.
Installment Used when uncertainty in collecting future payments.
Total profit = (total profit/selling price) * cash received
Cost Recovery Profit is only recognized once cash received > total costs.
IFRS
% Of Completion
I forget the name of the other method but when costs cannot be reliably measure, revenue = costs incurred until completion of a contract. For example, if a company sells a building for 5m and costs cannot be measured over a 2 year period here would be the Rev/exp
Yr 1 actual costs 1.5m
Rev = 1.5m
Cost = 1.5m
Profit = 0
Yr 2 actual costs 1.5m
Rev = 5m
Costs = 1.5m + 1.5m (prior period)
Profit = 3m
(Is this one right??)
Please feel free to provide any feedback.
Thanks!
Correction, total profit under the installment method is = (cash received / selling price )*total profit
This is pretty much how I understand it too.
Only build would be that under the completed contract method, revenue and costs are zero until the contract is completed and then it is all booked
What are the requirements to use the installment vs cost recovery method?
I think recovery method is used when the collection of the cash is highly uncertain and unpredictable, whereas installment method is where the collectability is not absolutely certain but is more predictable that recovery. Cost recovery is the most conservative method.