Definition
Under ASC 606, revenue is recognized over time when the customer simultaneously receives and consumes the benefit, the entity's work creates or enhances an asset the customer controls, or the asset has no alternative use and the entity has an enforceable right to payment for performance to date. The common input measure is cost-to-cost: percent complete equals costs incurred divided by estimated total costs. Revenue to date minus billings to date gives an underbilling (contract asset) or overbilling (contract liability). Legacy labels, such as costs and estimated earnings in excess of billings, are still common. Anticipated contract losses are accrued in full under the loss-provision guidance retained in ASC 605-35.
Why it matters in an audit or review
Estimated cost to complete is the key estimate and a fraud risk area. Auditors compare estimates with job cost reports and subsequent costs, and test whether losses are provided.
Example
(Illustrative) Contract $1,000,000. Costs to date $400,000; estimated total cost $800,000. Percent complete 50%. Revenue to date $500,000. Billings to date $450,000, so a $50,000 underbilling is recorded as a contract asset.
Common mistakes
- Not updating the estimated cost to complete.
- Counting the cost of uninstalled materials toward progress without adjusting the measure.
Sources
- FASB ASC 606-10-25-27 (criteria for revenue recognized over time) and 606-10-25-31 through 25-37 (measuring progress)
- FASB ASC 606-10-45 (contract assets and contract liabilities)
- FASB ASC 605-35-25-45 through 25-49 (provision for losses on contracts)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error