Question

When is the cost-to-cost method an appropriate method to recognize revenues. What are some of the potential risks associated with this practice?

Answer 1

The cost to cost method is a way of recognizing the revenues received through a contract. In this method the percentage of costs incurred to date divided by the total costs of the contracts are applied to the revenue of the contract.

This method can be applied when the business is constantly reviewing the project, the costs incurred are as per the plan or updated as per the current records.

Some of the potential risks that are associated with this practice are , the costs incurred for the project necessarily do not mean that the work completed will be certified by the contractor. This may result in incorrect recognition of revenue. Also, tracking costs is of vital importance and any miss out any lead to over /under recognition of revenues.