The following disclosure is from the 2007 Notes to the Consolidated Financial Statements for EADS, the parent company of plane manufacturer Airbus.
Summary of Significant Accounting Policies Revenue Recognition
For construction contracts, when the outcome can be estimated reliably, revenues are recognized by reference to the stage (percentage) of completion of the contract activity. The stage of completion of a contract may' be determined by a variety of ways. Depending on the nature of the contract, revenue is recognized as contractually agreed technical milestones are reached, as units are delivered or as the work progresses. Whenever the outcome of a construction contract cannot be estimated reliably, revenue is only recognized to the extent of the expenses incurred that are recoverable. Changes in profit rates are reflected in current earnings as identified. Contracts are reviewed regularly and in case of probable losses, provisions are recorded.
Provisions
Provisions for contract losses are recorded when it becomes probable that estimated contract costs based on a total cost approach will exceed total contract revenues. Contractual penalties are included in the contractual margin calculation. Provisions for loss making contracts are recorded as write-downs of work-in-process for that portion of the work which has already been completed, and as provisions for the remainder. Losses are determined on the basis of estimated results on completion of contracts and are updated regularly.
Required:
Summarize the methods EADS uses to recognize revenue for construction contracts.