Percentage-of-completion method

Percentage of Completion (PoC) is an accounting method of work-in-progress evaluation, for recording long-term contracts. For such tasks, this is the only method authorized by the International Financial Reporting Standards (IFRS).

Revenues and gross profit are recognized each period based on the construction progress-in other words, the percentage of completion. construction costs plus gross profit earned to date are accumulated in an inventory account(construction in Process), and progress billings are accumulated in a contra inventory account (Billing on Construction in Process).

Although the formula for recognizing income in the current period can vary, a widely accepted one is as follows:

$Inc_{k}=[{\frac {\sum _{i=1}^{m}Costs_{i}}{\sum _{i=1}^{N}E(Costs_{i})}}\cdot [\sum _{i=1}^{N}Revenues_{i}-\sum _{i=1}^{N}E(Costs_{i})]]-\sum _{i=1}^{m-1}Inc_{i}.\,$

where... $m=\,$ the number of periods lapsed since the inception of the contract.

$N=\,$ the expected length of the contract.

$k=\,$ the current period.

Examples

For example lets say our total estimated cost for the contract is $10,000 and our contract value is $12,000. We know that project will be completed in 4 years. Now after first year we see that total cost incurred in first year is $3,000. So according to PoC method- Cost percentage = 3000/10000 = 30% So we will recognize 30% revenue in first year's income statement.

Income statement of AnantPurohit corporation Pvt. Ltd. for the year ended on xx/yy/zzzz

Sales	3,600 (30% of 12,000)
Cost of goods	3,000
Profit	600

from next year, some more complicated part enters in the game Lets say after completion of the second year, our expected cost changed to 11,000 and our cost to date is 5,500 then percentage completed = 5,500/11,000 = 50% Revenue to be recognized = (50% of 12,000) - 3,600 (previously recognized) = 2,400

Income statement of AnantPurohit corporation Pvt. Ltd. for the year ended on xx/yy/zzzz+1

Sales	2,400
Cost of goods	2,500 (5,500 till date - 3,000 last year)
Loss	100

Now lets say for the next year, our total cost estimation is increased to 5000 due to increases in raw material and labor costs. So we know that we are going to incur a loss of 3000 at the end of contract period. For third year our cost to date reaches 10500 so according to Poc- Percentage completion = 10,500/15,000 = 70% Revenue = 70% of 12,000 - previously recognized = 8400 - 6000 = 2400

Income statement of AnantPurohit corporation Pvt. Ltd. for the year ended on xx/yy/zzzz+2

Sales	2,400
Cost of goods	5,000
Loss	2,600

In final year, our cost is 4,500 and revenue is 3,600

Sales	3,600
Cost of goods	4,500
Loss	900

Total Profit/Loss from the contract = 600-100-2,600-900 = 3,000 Net Loss

External links

• Percentage-Of-Completion Method at Answers.com