Over-time revenue recognition and progress measurement

Getting the over-time versus point-in-time call wrong on a multi-year infrastructure contract does not just shift a few days of revenue: it can move tens of millions of SAR of margin between reporting periods, distort gross margin trends the market and lenders rely on, and trigger covenant or bonus-plan disputes. Because most works-in-progress contracts qualify for over-time recognition, getting the progress measure wrong (rather than the over-time test itself) is the more common and more consequential failure, since it directly misstates revenue, cost of sales and the contract asset/liability balance every single period until the contract closes.

Is the asset being built customized for this specific customer with no alternative use to you if they walked away? Does your contract give you an enforceable right to payment for work performed to date, including a reasonable margin, if the customer terminates without cause? Are eligible costs incurred to date and total estimated costs to complete tracked reliably enough to compute a defensible percentage of completion? Does your cost-to-cost input measure exclude uninstalled materials and abnormal costs that would distort progress?

1. Confirm the over-time test: does the asset have no alternative use to the contractor (contractually or practically restricted) AND does the entity have an enforceable right to payment for performance completed to date (including a reasonable margin) if the customer cancels without cause?
2. If both conditions hold, revenue is recognized over time; if not, defer to a point-in-time transfer (e.g. handover/acceptance).
3. Select a single progress method for the performance obligation (input method, typically cost-to-cost, or an output method such as surveys/milestones) and apply it consistently to similar contracts.
4. Build the cost-to-cost numerator and denominator from the approved cost-to-complete forecast, excluding costs that do not depict transfer of control (uninstalled bulk materials, abnormal waste, rework).
5. At each reporting date, recompute percentage complete, refresh the total estimated cost, and true up cumulative revenue and margin recognized to date, never true up prospectively only.
6. Reconcile cumulative revenue recognized against cumulative amounts billed/certified to derive the net contract asset or contract liability for presentation.

Measure cumulative revenue as total transaction price multiplied by percentage of completion; percentage of completion under cost-to-cost equals eligible costs incurred to date divided by total estimated eligible costs. Exclude uninstalled materials, abnormal costs and financing components from the cost base. Subsequently remeasure the estimate at every reporting date as a change in accounting estimate (cumulative catch-up), not retrospectively; recognize any estimated loss on the remaining scope in full and immediately once identified. Present the difference between cumulative revenue recognized and cumulative amounts billed as a net contract asset (unbilled) or contract liability (billed in excess of revenue) per contract, not offset across unrelated contracts.

Disclose: (1) accounting policy for over-time recognition and the progress measurement method used; (2) disaggregation of revenue by contract type, sector or geography; (3) opening and closing balances of contract assets and contract liabilities and the amount of revenue recognized from opening contract liabilities; (4) significant judgments in determining the timing of satisfaction and the progress measure; (5) remaining performance obligations and expected timing of recognition (transaction price allocated to unsatisfied obligations); (6) net contract asset/liability position per major contract or contract class, not offset across unrelated contracts.

• Using cash collected or amounts billed as a proxy for progress instead of an approved progress method
• including the cost of uninstalled bulk materials or advance-purchased equipment in the cost-to-cost numerator, which inflates progress
• failing to refresh the total estimated cost-to-complete every period, so stale estimates mask emerging losses
• recognizing revenue on retrospective catch-up only at year-end audit instead of each interim period
• offsetting contract assets on one contract against contract liabilities on a different, unrelated contract
• not reassessing the enforceable-right-to-payment conclusion when contract terms are amended.