Measuring progress towards complete satisfaction

Learning objectives

• Determine a single method of measuring progress for each obligation (output methods or input methods) that faithfully depicts the transfer of control.L2, L3
• Calculate revenue by reference to progress measured on costs incurred, excluding costs that do not depict the entity's performance (for example, significant wasted costs not reflected in the contract price).L2, L3, L4
• Explain that when progress cannot be reasonably measured but the costs will be recovered, revenue is recognised only to the extent of the costs incurred.L2, L3
• Recognise revenue for the period by reference to progress.L2, L3

Normative references

• IFRS 15 §39For each obligation satisfied over time, the entity recognises revenue by measuring progress towards complete satisfaction; the objective is to depict the entity's performance in transferring control of the promised goods or services.
• IFRS 15The entity applies a single method of measuring progress for each obligation satisfied over time, consistently to similar obligations and in similar circumstances, and remeasures progress at the end of each reporting period.
• IFRS 15Appropriate methods include output methods and input methods (guidance in paragraphs B14-B19); the choice takes into account the nature of the good or service that the entity promised to transfer.
• IFRS 15The measure of progress excludes goods or services for which control does not transfer to the customer and, conversely, includes those for which control transfers in satisfying the obligation.
• IFRS 15 §43As circumstances change over time, the entity updates its measure of progress to reflect changes in the outcome of the obligation; such changes are changes in accounting estimates under IAS 8.
• IFRS 15 §44Revenue for an obligation satisfied over time is recognised only if the entity can reasonably measure its progress, which requires the reliable information needed to apply an appropriate method.
• IFRS 15 §45When the entity cannot reasonably measure the outcome of an obligation (for example, in the early stages of a contract) but expects to recover the costs incurred in satisfying it, it recognises revenue only to the extent of the costs incurred until it can reasonably measure that outcome.
• IFRS 15The methods for measuring progress of an obligation satisfied over time are output methods and input methods; the choice must take into account the nature of the good or service.
• IFRS 15Output methods directly measure the value to the customer of what has been transferred relative to the remaining promised (surveys of performance completed, appraisals of results achieved, milestones, time elapsed, units produced or delivered). The entity checks that the measure chosen faithfully depicts its performance; for example, units delivered may fail to do so if work in progress controlled by the customer is significant.
• IFRS 15 §B16If the right to consideration corresponds directly with the value to the customer of the performance completed to date (for example, a fixed hourly rate), the entity may, as a practical expedient, recognise revenue in the amount to which it has a right to invoice.
• IFRS 15Outputs may not be directly observable and the information required may not be available without undue cost, which may make an input method necessary.
• IFRS 15 §B18Input methods measure progress on the basis of the entity's efforts (resources consumed, labour hours expended, costs incurred, time elapsed, machine hours used) relative to the total expected. If the efforts are expended evenly throughout the period, straight-line recognition may be appropriate.
• IFRS 15 §B19Where there is no direct relationship between inputs and the transfer of control, the entity excludes inputs that do not depict its performance: costs of significant inefficiencies not reflected in the price (unexpected wasted materials) and costs not proportionate to progress. In the latter case, it may recognise revenue equal to the cost of a good (with no margin) if, at contract inception, the good is not distinct, the customer obtains control of it significantly before the related services, its cost is significant and it is procured from a third party without the entity being significantly involved in designing or manufacturing it.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

23 questions

• Bâtiroc is constructing an office building on its customer's land; the contract is a single performance obligation satisfied over time, with progress measured as costs incurred relative to total expected costs. Price: EUR {initial_price}; total expected costs: EUR {initial_costs}. At the end of 20X1, costs incurred amount to EUR {costs_incurred} and the revenue recognised reflects progress. Early in 20X2, the parties approve a change to the plans: price increased by EUR {price_increase}, expected costs increased by EUR {additional_costs}. The remaining work is not distinct from the work already performed. Compute the cumulative catch-up adjustment (decrease in revenue) recognised at the modification date.L3
• The Navirex shipyard is building a research vessel for an oceanographic institute. The contract is a single performance obligation satisfied over time; progress is measured using costs incurred. Agreed price: EUR {contract_price}; expected costs: EUR {expected_costs}; costs incurred at 31 December 20X1: EUR {costs_to_date}. On 2 January 20X2, the institute approves the installation of an on-board laboratory integrated into the hull: the price increases by EUR {price_change} and expected costs by EUR {cost_change}. This work is not distinct from the vessel under construction. Compute the cumulative revenue after the modification and the cumulative catch-up adjustment (increase in revenue) recognised on 2 January 20X2.L4
• For a single performance obligation satisfied over time, the entity may measure progress on part of the work using an output method and on the rest using an input method, and then add the results together.L2
• At the end of 20X2, Travaux Garance revises upwards the total expected costs of a construction project whose performance obligation is satisfied over time, following an unforeseen rise in material prices in 20X2 (new information, case data), which changes its progress. This update of the measure of progress is a change in accounting estimate under IAS 8.L3
• Which of the following measures is an output method?L2
• Lumière Conseil measures progress on a consulting engagement satisfied over time by comparing the hours worked by its consultants with the total expected hours. What type of method is this?L2
• Which of the following statements about choosing a method of measuring progress are correct?L3
• Bâtisud is building a warehouse for a customer; the performance obligation is satisfied over time. The transaction price is {contract_price}. Total expected costs amount to {total_expected_costs} and costs incurred at 31 December 20X1, the first reporting date, to {costs_incurred}. Bâtisud has concluded that costs incurred faithfully depict its performance. Calculate the percentage of completion and the revenue for 20X1.L2
• Software developer Ingésoft is building bespoke software for a mutual insurer, which controls the developments as they are made; the obligation is satisfied over time. The agreed fixed fee, the only component of the price, is {fixed_fee}. The project's cost budget, considered reliable, is {budgeted_costs}. At 30 June 20X2, the first reporting date since the project started, Ingésoft has incurred {costs_to_date} of costs, all reflecting its performance, and has invoiced {amount_invoiced} under the contractual schedule. Ingésoft measures progress using costs. What revenue does it recognise at that date?L3
• Ponts Ravel is building a bridge for a local authority, an obligation satisfied over time and measured using costs incurred. Transaction price: {contract_price}. Revenue recognised in 20X1: {revenue_20x1}. At 31 December 20X2, cumulative costs incurred amount to {cumulative_costs} and total expected costs are revised to {revised_total_costs}. Calculate the revenue for 20X2.L3
• Kerlo shipyard is building a fishing vessel for a shipowner; the obligation is satisfied over time and progress is measured using costs. Fixed price: {contract_price}. At the end of year 1, costs incurred are {costs_year_1} out of total expected costs of {estimate_year_1}. At the end of year 2, cumulative costs reach {cumulative_costs_year_2} and total expected costs are increased to {revised_estimate_year_2} following a rise in steel prices. Determine the revenue for year 1 and for year 2.L4
• Hydrotech is building a pumping station, an obligation satisfied over time, for a price of {contract_price}. At 31 December 20X1, four months after the start, the soil surveys are incomplete and Hydrotech cannot yet reasonably measure the outcome of the contract. It nevertheless expects to recover the costs incurred, which amount to {costs_incurred}. It has invoiced an advance of {amount_billed}. What revenue does it recognise in 20X1?L3
• Sylvae Conseil began, in November 20X2, an engagement to redesign a hospital's processes, satisfied over time, for a fee of {fee}. At 31 December 20X2, the final scope has not been settled and the firm cannot reasonably measure the outcome of the engagement; it nevertheless expects to recover the costs incurred, that is {costs_to_date}. Its usual target margin is {target_margin}. What revenue does it recognise for 20X2?L3
• Mécanique Orvault is manufacturing a special press in its customer's plant, and the customer controls the construction as it progresses; the obligation is satisfied over time and progress is measured using costs. Transaction price: {contract_price}; total expected costs: {total_expected_costs}; costs incurred at 31 December 20X1: {costs_incurred} (already recognised as expenses). Orvault can only invoice after final acceptance of the press. Record the revenue entry at 31 December 20X1.L2
• Solaris Énergie is installing a solar power plant on land owned by a municipality, which controls the plant as it is built. Fixed price: {fixed_price}; total expected costs, unchanged: {expected_costs}. At the end of 20X2, cumulative costs reach {cumulative_costs}; revenue recognised in 20X1 was {prior_revenue}. The contract provides for a single invoice on commissioning. Record the revenue entry for 20X2 (progress measured using costs).L3
• Lumen Réseaux is upgrading a city's street lighting (obligation satisfied over time, price of 1,000,000, total expected costs of 800,000; progress measured using costs). At 31 December 20X1, costs incurred amount to 380,000, including 100,000 of light fittings purchased and stored in Lumen's warehouse, not yet installed; under the contract, the city will obtain control of them only when they are installed. What revenue does Lumen recognise at 31 December 20X1?L4
• For a renovation contract of Atelier Corbel (price of 1,500,000, obligation satisfied over time, progress measured using costs), an accounting assistant prepared the following at 31 December 20X2: cumulative costs 900,000; total expected costs 1,200,000; progress 75%; cumulative revenue 1,125,000; revenue recognised in 20X2: 1,125,000. Revenue for 20X1 was 450,000. Where is the error?L3
• Génie Civil Arvel is building a tunnel (price of 2,400,000, progress measured using costs). End of 20X1: costs incurred 500,000 out of total expected costs of 2,000,000, revenue recognised 600,000. End of 20X2: cumulative costs 1,500,000, total expected costs revised to 2,500,000 because the rock is harder than expected. The controller restates 20X1 (progress reduced to 20%, revenue 480,000) and recognises revenue of 960,000 in 20X2. Fact of the case: under IAS 8, the effect of a change in accounting estimate is recognised in the period of the change, without restating prior periods. Fact of the case: the provision for the onerous contract under IAS 37 is recognised separately and is not part of the question. What is the error?L4
• Linéo is building four assembly lines in a manufacturer's plant, and the manufacturer controls the work in progress as it is performed; the contract is a single obligation satisfied over time. At 31 December 20X1, one line is complete and delivered, and two others are almost finished in the customer's plant. The finance director proposes measuring progress by lines delivered, that is 25%. What is your assessment?L3
• An entity recognises revenue for an obligation satisfied over time only if it can reasonably measure its progress, which requires the reliable information needed to apply an appropriate method.L2
• Valdrôme Bâtiment is building a warehouse for a customer; the obligation is satisfied over time and progress is measured by costs incurred. Price: 1,000,000; total expected costs, excluding waste: 800,000. In 20X1, Valdrôme incurred costs of 300,000, of which 60,000 relate to concrete lost through an unexpected handling error, not reflected in the contract price (a significant loss, case datum). The accounting assistant computes progress of 300,000 / 800,000 = 37.5%. What is the error?L3
• The consulting firm Orsenne Conseil assists a customer with the overhaul of its purchasing. The obligation is satisfied over time (case datum). Fees are 150 per hour worked, invoiced monthly, and Orsenne Conseil has established that this hourly rate corresponds directly to the value to the customer of the performance completed (documented analysis). During March 20X1, Orsenne Conseil worked 120 hours. How may Orsenne Conseil recognise revenue for March?L3
• Hautvallon is renovating a customer's factory for a price of {contract_price}; the obligation is satisfied over time and progress is measured by costs incurred (documented choice). Total expected costs amount to {total_expected_costs}, of which {unit_cost} for a cooling unit bought from a supplier, without significant involvement of Hautvallon in its design or manufacture. The customer obtains control of the unit as soon as it is delivered to the site in 20X1, well before its installation; the unit is not distinct, and its cost is significant relative to the total (case data). Hautvallon has concluded that recognising revenue equal to the cost of the unit best depicts its performance (judgement, case datum). At 31 December 20X1, in addition to the delivered unit, Hautvallon has incurred {other_costs_incurred} of other costs. Compute the percentage of completion of the other work and the revenue recognised for the unit.L4