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9.5 Apply Revenue Recognition Principles to Long-Term Projects

Long-Term Projects​

Long-Term Projects are projects that take more than one accounting period to complete (e.g., construction, software development, consulting).

Revenue Recognition Methods​

Two main methods:

  1. Percentage of Completion Method
  2. Completed Contract Method

Percentage of Completion Method​

How it Works:

  • Recognize revenue as project progresses
  • Based on percentage of work completed
  • Matches revenue with costs incurred

Calculation:

  • Percentage Complete = Costs Incurred ÷ Total Estimated Costs
  • Revenue to Recognize = Total Contract Price × Percentage Complete
  • Cost of Revenue = Costs Incurred

Example:

  • Contract Price: €100,000
  • Total Estimated Costs: €80,000
  • Costs Incurred This Year: €24,000

Calculation:

  • Percentage Complete: €24,000 ÷ €80,000 = 30%
  • Revenue to Recognize: €100,000 × 30% = €30,000
  • Cost of Revenue: €24,000
  • Gross Profit: €30,000 - €24,000 = €6,000

Journal Entry:

410000 Accounts Receivable        €30,000
700000 Contract Revenue                        €30,000
To recognize revenue (percentage of completion)

602000 Cost of Revenue            €24,000
[Various Asset/Expense Accounts]                €24,000
To record costs incurred

Completed Contract Method​

How it Works:

  • Recognize all revenue when project is complete
  • Recognize all costs when project is complete
  • No revenue or profit recognized during project

Example:

  • Contract Price: €100,000
  • Total Costs: €80,000
  • Project completed in Year 3

Year 1 and 2:

  • No revenue recognized
  • Costs accumulated in Work in Progress

Year 3 (Completion):

410000 Accounts Receivable        €100,000
700000 Contract Revenue                        €100,000
To recognize revenue at completion

602000 Cost of Revenue            €80,000
[Work in Progress Account]                     €80,000
To recognize costs at completion

Which Method to Use?​

Percentage of Completion:

  • Preferred when project progress can be measured
  • Better matches revenue with costs
  • More accurate interim reporting

Completed Contract:

  • Used when progress cannot be measured
  • Used for very short-term projects
  • Simpler but less accurate

Luxembourg Considerations​

Luxembourg SMEs:

  • Most SMEs don't have long-term projects
  • May apply to construction, consulting, software
  • Must follow accounting standards
  • Must comply with PCN requirements

Luxembourg Compliance Note​

For long-term projects in Luxembourg:

  • Must follow accounting standards
  • Must use appropriate method
  • Must estimate costs accurately
  • Must comply with PCN
  • Must handle VAT correctly
  • Must maintain proper documentation

Think It Through​

Why might the percentage of completion method provide more useful information than the completed contract method? When might completed contract be more appropriate?