Question

“The Completed Contract Method” and the “Percent of Completion Method” are two options for long-term construction revenue recognition. In your opinion, which makes more sense? Provide support for your position.

Answer 1

Under "Completed Contract Method" revenue and expenses are recorded at the completion of the contract even if these occur during contract. Whereas in “Percent of Completion Method” revenue is recorded as per the percentage of contract completed and not lump sum at once. According to me “Percent of Completion Method” makes more sense to me as this method accounts for revenue during the contract and thus reduces fluctuations in financial statements. Whereas under completed contract, there are no revenues thus no tax in starting years but after completion, there is a big burden of tax liability. As tax rates keep increasing, the company has to pay more tax and there is a big fluctuation in the financial statements of the company. The completed contract is good to defer tax liability but company ends by paying more tax than it would have in previous years.