When is revenue recognized under the completed contract method, and how does it compare to percentage of completion?

Under the completed contract method (now framed as "point in time" recognition under IFRS 15 / ASC 606), a company defers ALL revenue and profit recognition until the contract is substantially complete. During the construction period, costs are accumulated as an asset, and billings are accumulated as a liability — but no profit appears on the income statement until completion.

When "Point in Time" Applies:

Under IFRS 15, revenue is recognized "over time" only if at least one of three criteria is met:

1. The customer simultaneously receives and consumes the benefits
2. The company's performance creates or enhances an asset the customer controls
3. The asset has no alternative use to the company AND the company has an enforceable right to payment for work completed

If none of these criteria are met, revenue is recognized at a point in time — effectively the completed contract approach.

Comparison Using Ridgeway's $12M Contract:

Balance Sheet During Construction (Completed Contract):

The net of CIP minus billings appears as either a current asset (if CIP > billings) or a current liability (if billings > CIP).

Analytical Implications:

1. Revenue volatility — completed contract produces lumpy revenue (zero, zero, then a large amount). This makes year-over-year comparisons less meaningful.
2. Working capital distortion — CIP builds up as a large asset during construction years.
3. Conservatism — completed contract is more conservative because it never recognizes profit until delivery.
4. Cash flow — operating cash flow is identical under both methods (same cash collected). Only the income statement timing differs.

Exam Tip: Total revenue, total profit, and total cash flows are the SAME under both methods over the life of the contract. Only the timing differs. CFA Level I loves testing this concept.

Explore revenue recognition nuances in our CFA Level I FRA course.