How do I choose between input and output methods for long-term contract revenue recognition?

Question

AcadiFi · Accepted Answer

Under IFRS 15 and ASC 606, progress toward satisfying a performance obligation over time can be measured using either input methods (resources consumed, labor hours, costs incurred) or output methods (units delivered, milestones achieved, surveys of completion). The choice should faithfully depict the transfer of control to the customer. Example: Seabright Marine signs a $240M contract to build three identical LNG tankers over 36 months. Using the input method, if cumulative costs incurred through year 1 are $72M out of total estimated costs of $180M, progress is 40%, so revenue recognized = 40% x $240M = $96M. Using an output method based on completed tankers, if zero tankers are delivered by year-end, revenue is $0. Output methods are preferred when deliverables transfer value discretely (milestones, units), while input methods fit continuous production where work-in-progress has no standalone value. Watch for wasted materials or uninstalled goods under the cost-to-cost input method — ASC 606 requires you to exclude costs that don't contribute to progress (e.g., significant inefficiencies or abnormal scrap).

```mermaid
flowchart TD
A[Performance Obligation] --> B{Transfer Pattern}
B -->|Continuous| C[Input Method]
B -->|Discrete| D[Output Method]
C --> E[Costs Incurred %]
D --> F[Units Delivered]
```

How do I choose between input and output methods for long-term contract revenue recognition?

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