When to recognize revenue?

CFA Level I
#1

In Stalla, it shows an example of a project for three years with cash received from the customer every year. In recognizing revenue using the completed contract, it shows zero revenue for the 1st and 2nd years, and then all the revenue go to the third year. The raionale is that this is based on a completed contract method, so no revenue is recognized until the end. This somehow doesn’t make sense. They did RECEIVE cash from the customer in the 1st and 2nd year, so how can they not recognize it? Could someone confirm their understanding of this? And if so, how does the company treat those received revenues and incurred costs?

#2

I think I understand it now. Regardless of cash received for a project, whether percentage-of-completion or completed contract, no revenue is recognized except as dictated by the method. So, with completed contract, no revenue is recognized till the end. With percentage-of-completion, only the correct percentage is recognized, no matter how much cash you receive. Cool.

#3

It feels really great when I’m talking to myself.

#4

Under the completed contract method, revenues and expenses are not recognized until completion of the contract (see CFAi volume 3, page 149). Costs incured during execution of the contract (that otherwise would have been expenses) are kept in an inventory account, the cash received from the customer is unearned revenue, a liability, both extinguished at contract completion.

#5

you are right, dreary. cash has nothing to do with revenue recognition.

#6

Dreary Wrote: ------------------------------------------------------- > I think I understand it now. Regardless of cash > received for a project, whether > percentage-of-completion or completed contract, no > revenue is recognized except as dictated by the > method. So, with completed contract, no revenue > is recognized till the end. With > percentage-of-completion, only the correct > percentage is recognized, no matter how much cash > you receive. Cool. Thanks Dreary for talking to yourself. People like me are learning from what you are talking. So keep talking!