Part 2 (ref. Example 8)

Builder Cos contract with Customer Co. to construct the commercial building specifies consideration of $1 million. Builder Co's expected total costs are $700,000. The Builder incurs $420,000 in costs in the first year. Assuming that costs incurred provide an appropriate measure of progress toward completing the contract, how much revenue should Builder Co. recognize for the first year?The standard states that for performance obligations satisfied over time (e.g., where there is a long-term contract), revenue is recognized over time by measuring progress toward satisfying the obligation. In this case, the Builder has incurred 60% of the total expected costs ($420,000/$700,000) and will thus recognize $600,000 (60% $1 million) in revenue for the first year.

This is the same amount of revenue that would be recognized using the

"percentage-of-completion" method under previous accounting standards, but that term is not used in the converged standard. Instead, the standard refers to performance obligations satisfied over time and requires that progress toward complete satisfaction of the performance obligation be measured based on input method such as the one illustrated here (recognizing revenue based on the proportion of total costs that have been incurred in the period) or an output method (recognizing revenue based on units produced or milestones achieved).