Which of the following methods of revenue recognition is recognized under both U.S. GAAP and IFRS for long-term construction-type contracts?

• A. Completed contract
• B. Cost recovery
• C. Fixed price
• D. Percentage of completion

Answer: (D)

The percentage of completion method is recognized under both U.S. GAAP and IFRS for long-term construction-type contracts due to its reflection of the project's progress in providing a more accurate picture of revenue and profit over the duration of the contract. This method allows for revenue to be recognized as work is completed, which aligns the recognition of revenue with the actual performance of the contractor.

By measuring the percentage of the project that is complete, companies can allocate revenues proportionately to the efforts expended up to that point. This approach can help provide better insights into both the income and the financial health of the project over time, as opposed to only recognizing revenue at the end of the contract, which might misrepresent a company’s operational performance throughout the contract period.

The completed contract method, which travels a different path by recognizing all revenue and expenses only at the completion stage, is primarily used under U.S. GAAP and is not accepted under IFRS for long-term contracts. Cost recovery is typically used for industries with high credit risk and is not a recognized method for revenue over the term of a construction contract. The fixed price concept refers more to the contract terms than a recognition method itself, and thus would not be appropriate as a stand-alone revenue recognition principle