RECOGNITION OF

CONTRACT REVENUE
AND COST/EXPENSES
The contract can only be done when it has
been agreed to establish:

1. The consideration to be of each party in respect of the

asset to be constructed.

2. The enforceable rights exchanged; and

3. Terms and manner of settlement.

 FIXED PRICE CONTRACTS
• Probable that economic benefits of the contract will flow the
enterprise
• Total contract revenue can be reliably measured.
• Stage of completion at the period end and costs to complete the
contract can be reliably measured; and
• Cost attributable to the contract can be identified clearly and be
reliably measured (actual costs can be compared to previous
estimates).
Given:
Contract Price P100,000
Cost to date 48,000
Total estimated costs 80,000
% of completion (P48,000/80,000) 60%

Revenue (60% x P100,000) P60,000

Less: Cost/Expenses (60% x P80,000) 48,000
Gross Profit (60% x P20,000) 12,000
 COST PLUS CONTRACTS
• Probable that economic benefits of the contract will flow to
the enterprise.
• Costs attributable to the contract (whether or not
reimbursable) can be identified clearly and be reliably
measured.
 20x3 20x4
Cumulative costs incurred on work to date 100,000 150,000
Agreed profit as a percentage to costs 20% 20%

20x3
Revenue (Cost of 100,000 plus(20% of P100,000)) P120,000
Less: Cost/Expenses (given) 100,000
Gross Profit (20% x P100,000) 20,000

20x4
Revenue (Cost of 50,000 plus(20% of P50,000)) P120,000
Less: Cost/Expenses (P150,000 less P100,000 in 20x3) 100,000
Gross Profit (20% x P50,000) 20,000
 PERCENTAGE-OF-COMPLETION
(OVER TIME)
- It is used when the construction contract can be
estimated reliably.

- Avoids the mismatch between the cost being

recognized as they are incurred and revenue only
being recognized when the contract is completed.
 1. INPUT MEASURES/COST BASIS
- It recognize revenue on the basis of the efforts or inputs to satisfy the
performance obligation relative to the total expected inputs.
Examples of input method include:
a. Labor-hours worked
b. Cost incurred
c. Time elapsed
d. Resources consumed
 A. COST TO COST METHOD
(PROPORTION OF CONTRACT COST INCURRED)
-the degree of completion is determined by comparing costs already incurred
with the most recent estimates of total expected cost to complete the
project.

Cost incurred to date

Total Estimated Cost (most recent) = Percent complete
 Year Actual Cost Estimated Cost Total Percentage of
Incurred to Date to Complete Estimated completion
Cost

20x3 P 104,000 P 156,000 P 260,000 40

20x4 91,000
Total 195,000 65,000 260,000 75
20x5 65,000
Total 260,000 0 260,000 100
 B. EFFORTS-EXPENDED METHODS
-based on the same measure of work performed.

For example, if the measure of work performed of labor hours, the ratio of
hours worked to date to the total estimated hours would produce the
percentage for use in measuring income earned.
 2. OUTPUT MEASURES/SALES BASIS
-made in terms of results achieved.

Examples of output methods include:

a. Units produced or delivered
b. Tons produced
c. Storey’s of a building completed
d. Appraisal of results achieved
e. Kilometers of a highway completed
f. Contract milestones reached or achieved
g. Time elapsed and
h. Values added.