Uninstalled materials and distortion of cost-to-cost progress measurement

Including the cost of steel, cables or precast elements sitting unused in a laydown yard within the cost-to-cost progress calculation inflates percentage complete and pulls forward revenue the customer has not actually received control of yet, since control of the finished, installed work (not the raw material) is what IFRS 15 requires to have transferred, this is one of the most common cost-to-cost manipulation risks in materials-heavy infrastructure contracts.

Have materials purchased or delivered to site or a laydown yard but not yet incorporated into the permanent works been separately identified from installed work-in-progress cost? Has the customer obtained control of those specific uninstalled materials, for example through contractual title and risk-transfer clauses, separately from control of the installed work? Would including the uninstalled material cost in costs incurred to date materially overstate percentage complete relative to work actually performed, and is total estimated cost treated consistently? Is there a reliable materials-on-site ledger reconciled to the progress schedule each reporting period?

1. Identify materials that have been purchased or delivered to site/laydown yard but not yet incorporated into the permanent works.
2. Assess whether the customer has obtained control of those uninstalled materials specifically (which can occur in limited circumstances even before installation, e.g. where the contract gives the customer title and risk on delivery and the materials are specifically identified to the contract), absent that, control has not transferred.
3. Where control of the uninstalled materials has not transferred, exclude their cost from costs incurred to date (the numerator) until they are installed, but keep it in total estimated cost (the denominator), because the materials will still be installed and remain part of the total cost of satisfying the performance obligation. Total estimated cost is not reduced, and the measure of progress catches up when installation occurs; removing the materials from both parts of the fraction would overstate progress.
4. Only in the narrow case where the customer obtains control of the materials before installation (step 2), the cost of the materials is significant relative to total expected costs, and the entity did not design or manufacture them, may a zero-margin approach be appropriate: recognize revenue equal to the cost of the materials when control transfers, and exclude that cost from both costs incurred and total estimated cost so the margin is earned on the remaining work. This is the only case in which total estimated cost is reduced, and it is a narrow exception, not a default.
5. Recognize the uninstalled materials as inventory or a separate contract cost asset until installed, then include their cost in the progress calculation from the period installation occurs.

Maintain a separate materials-on-site or materials-in-transit ledger reconciled to the cost-to-cost progress schedule each period so uninstalled quantities are consistently identified, valued, and either excluded from progress or, in the narrow cost-recovery-margin exception, recognized as revenue only to the extent of cost. Reconcile the ledger to physical site records or store records to prevent double counting of materials transferred from store to installation within the same period.

Disclose: (1) the accounting policy for treating uninstalled materials in the progress measurement method; (2) the amount of uninstalled materials excluded from cost-to-cost progress at the reporting date, if material; (3) any instances where a cost-recovery-margin approach was applied to material procurement, and the rationale; (4) significant judgments applied in determining whether control of specifically identified materials transferred before installation.

• Including the full purchase cost of bulk materials delivered to a laydown yard in the cost-to-cost numerator as soon as they are paid for, inflating progress well ahead of actual installation
• failing to maintain a reconciled materials-on-site ledger, so double counting occurs when materials move from '
• delivered'
• to '
• installed'
• status
• applying a full-margin (not cost-recovery) revenue recognition to uninstalled materials as if the customer had obtained control of the finished installed work
• removing uninstalled materials from total estimated cost as well as from costs incurred when control has not transferred (for example 17,000,000 / 37,000,000 = 45.9% instead of 42.5%), which overstates progress
• total estimated cost is reduced only where the zero-margin approach applies.