International Financial Reporting Standards_guide.pdf

268 Chapter 24 Construction Contracts (IAS 11)
24.6.2 At each reporting date, the percentage-of-completion method is applied to up-todate
estimates of revenue and costs so that any adjustments are reflected in the current
period and future periods. Amounts recognized in prior periods are not adjusted.
24.6.3 Table 24.1 summarizes how the choice of accounting method affects the Statement of
Financial Position, Statement of Comprehensive Income, statement of cash flows, and the key
financial ratios when accounting for long-term projects. The effects are given for the early
years of the project’s life.
TABLE 24.1 Impact of Percentage-of-Completion Method on Financial Statements
Item or ratio
Statement of Financial Position
Income Statement
Statement of Cash Flows
Size of Current Assets
Size of Current Liabilities
Net Worth
Profit Margin
Asset Turnover
Debt or Equity
Return on Equity
Cash Flow
Percentage-of-completion method (as opposed to a situation where the
outcome of a contract cannot be reliably estimated)
Billings recorded but not received in cash are recorded as accounts receivable.
Cumulative project expenses plus cumulative reported income less cumulative billings is
recorded as a current asset if positive or a current liability if negative.
Upon project completion, work-in-progress and advanced billings net to zero.
Uncollected billings are accounts receivable.
Project costs are recorded as incurred.
Revenues are recognized in proportion to the costs incurred during the period relative to
the estimated total project cost.
Reported earnings represent estimates of future operating cash flows.
Estimated losses are recorded in their entirety as soon as a loss is estimated.
Cash received from customers is reported as an operating cash inflow when received.
Cash expended is recorded as an operating cash outflow when paid.
Size of cash flow is the same because accounting choices have no effect on pretax cash
flows.
Higher if the cumulative work-in-progress (cumulative project costs and cumulative
project income) exceeds cumulative billings.
Same if cumulative billings equal or exceed work-in-progress.
Lower as only receipts in excess of revenues are deferred as liabilities.
Higher because earnings are reported before the project is complete.
Higher because earnings are reported during the project’s life.
Higher because sales are reported during the project’s life.
Lower because liabilities are lower and net worth is higher.
Higher because earnings are higher percentage-wise than the higher equity.
Same because accounting choices have no effect on cash flow.