Can someone give me a summary of the four different types of methods (percentage of completion, completed contract, installment sales and cost recovery). Mainly, when to use which and what is the difference under GAAP and IFRS?
Is there a difference between unable to estimate and payment is uncertain?
POC = (Cost incurred in period/Total Cost) * total net revenue
Installment = Revenue is earned as cash is received.(I always relate it to magazine subscriptions, sale occurs upfront (january 1 lets say), but revenue is earned monthly when cash from the subscriber is received)
Completed Contract = Revenue/cost recognized at the end of the contraced period.
Cost Receovery = No revenue recognized until all costs have been billed.
What about which method(s) to use under IFRS and GAAP?
For example, IFRS can recognize can recognize revenue up to expenses (profit = $0) and GAAP can’t recognize any revenue (profit = $0).
I’m at work right now and can’t check my books so I don’t know exactly which is which.
According to both accounting standard setting bodies (FASB and IASB) revenue and costs is recognised when ithey can be riliably estimated. Consider 4 cases: revenue and costs are relibely estimated, either of them are reliably estimated and non of them is realably estimates.
If you consider the last extreme case, you cannot recognize the revenue as well as costs.
Percentage of the completion method is allowed under US GAAP and IFRS and is used in the projects when costs and revenue is reliably estimated.
It is not possible to estimate the revenue of the project. Under IFRS recognize the profit to the extent of the incurred costs (costs=100$ ==> revenue=100$ ==> income=0$). Under US GAAP recognize profit and costs at the end of the project (completed contract method).