Percentage-of-Completion Method
A revenue recognition method that records income proportionally as a long-term contract progresses toward completion.
What is Percentage-of-Completion?
The percentage-of-completion method recognizes contract revenue and costs incrementally as work progresses, based on the proportion of estimated total contract costs incurred to date. It is used for long-term construction, government, and engineering contracts where work spans multiple accounting periods. GAAP and IFRS require this approach when contract outcomes can be reliably estimated.
Example
A construction company with a $10 million contract that is 40% complete by year-end recognizes $4 million in revenue and the proportionate share of expected costs in that period, rather than deferring all revenue until project delivery.
Source: FASB ASC 606 — Revenue from Contracts with Customers