Question

Revenue Recognition (when it can be recorded) both by GAAP and IFRS. Describe (in your own words) the five (5) steps required for such, AND describe the methods used for extended, or long-term contracts.

Answer 1

In contracts with customers, a business should recognize revenue in such a way that it depicts the amount and timing of consideration received for work done.

The five key steps required for the revenue recognition principle are:
1. Identify the contract with a customer.
2. Identify the performance obligation(s) in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) each performance obligation is satisfied.

There are 2 main methods of accounting to determine when revenue is recognized for extended or long-term contracts:

1. Completed contract method (CCM)
2. Percentage of completion method (PCM)

Since the CCM allows the deferral of taxes, a large contractor must usually choose the PCM, however a small contractor can choose CCM if the estimated life of the contract is 2 years or less.