Long-term contract revenue recognition

In this video, the speaker explains how to recognize and measure revenue for long-term contracts, specifically using the percentage of completion method. The example used is a building construction contract spanning three years, from 2018 to 2020, with a total price of $120 million.

The process involves three main steps:

Estimate the percentage of completion: For 2018, actual costs were $24 million, with estimated additional costs of $72 million, leading to a total estimated cost of $96 million. This results in a completion percentage of 25%.

Calculate cumulative revenue: Based on the 25% completion, the cumulative revenue recognized for 2018 amounts to $30 million, yielding a profit of $6 million.

Determine current revenue: The speaker illustrates how to update these calculations for 2019, where actual costs were $18 million and additional estimated costs led to a projected loss, categorizing it as an "onerous contract."

In 2019, cumulative revenue equaled $96 million, and the project faced a total loss, requiring the recognition of expected future losses. By 2020, the project was completed, generating a profit of $40 million after adjusting for the previous year's estimated loss.

The video highlights the importance of accurately estimating costs and recognizing potential losses throughout the contract's duration.