The Generally Accepted Accounting Principles (GAAP) acknowledge the percentage of completion method (PCM) for revenue recognition on long-term contracts as long as the appropriate criteria are satisfied. Under GAAP, this approach is considered the best method for revenue recognition because it gives a more accurate depiction of the firm’s financial situation—income and expenses are accounted for throughout the duration of contract performance, instead of only upon completion of the contract.
Previously, PCM was outlined in ASC 605-35 (Construction-Type and Production-Type Contracts) until it was replaced by ASC 606: Revenue from Contracts with Customers, which went into effect for most entities in 2018. Although ASC 606 does not directly refer to the PCM method, it does contain a concept that is for all practical purposes synonymous: “revenue recognition over time.”
How GAAP Defines Revenue Recognition Over Time
According to ASC 606, entities are required to establish if revenue is recognized as time passes or at a specific moment. Revenue recognition may take place over a period of time—essentially the principles of the percentage of completion method—if any of the following situations occur:
- The service as the company performs the contract work (for example, routine maintenance or service agreements), and the customer rates at least temporarily the work done in the period.
- The company performs in the period of the contract work, develops or improves an asset, which is a building, that the customer controls during the performance period.
- The company performs the work at contract time, and for nondepleted resources, creates an asset without alternative use, and the company has an enforceable right of payment of the accomplished work.
Under these conditions, one or more of these situations, GAAP allows to progressively recognize revenue that is the inverse of the foundation logic of the percentage of completion method.
When the Method Is Commonly Used
The percentage of completion method is typically used by companies engaged in:
- Construction and engineering projects
- Defense and aerospace contracts
- Software and technology development
- Large-scale manufacturing with long production cycles
These industries rely on PCM because it reflects real-time profitability and financial progress.
Key Takeaway
Under modern GAAP, the percentage of completion method remains acceptable, though now it falls under the broader framework of revenue recognition over time in ASC 606. Companies must ensure they meet the criteria and use reliable estimates for costs, progress, and performance obligations. Proper application ensures compliance and presents a more accurate financial picture of ongoing projects. If you need professional assistance, contact Dimov Tax today. Our team presents expert support in taxation and accounting practices.