Reference no: EM13554775
Revenue Recognition for Long-Term Contracts: Outcome Cannot Be Reliably Measured
Kolenda Technology Group has a contract to build a network for a customer for a total sales price of $10 million. This network will take an estimated three years to build, but considerable uncertainty surrounds total building costs because new technologies are involved. In other words, the outcome cannot be reliably measured, but it is probable that the costs up to the agreed upon price will be recovered.
Assuming the following expenditures, how much revenue, expense (cost of construction), and income would the company recognize each year under IFRS and using the completed contract method under U.S. GAAP? The amounts periodically billed to the customer and received from the customer are not necessarily equivalent to the amount of revenue being recognized in the period. For simplicity, assume Kolenda pays cash for all expenditures.
1. At the end of Year 1, Kolenda has spent $3 million.
2. At the end of Year 2, Kolenda has spent a total of $5.4 million.
3. At the end of Year 3, the contract is complete. Kolenda spent a total of $6 million.
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