Which method is used for revenue recognition in long-term construction contracts?

The percentage-of-completion method is the recognized approach for revenue recognition in long-term construction contracts. This method allows contractors to recognize revenue in relation to the progress of the project. As work progresses, a proportion of the total contract revenue is recorded, reflecting the costs incurred to date versus the total estimated costs of the project. This aligns revenue recognition with the economic reality of the project's performance over time.

Using this method provides stakeholders with a more accurate picture of a company's performance and its financial health by matching revenue with the actual level of work completed. This approach is especially crucial for long-term contracts, where substantial time and resources are invested before completion, allowing companies to present a more timely financial outcome rather than waiting until contract completion.

Other methods, such as the fixed-price method or continuous-reporting method, do not account for the progress made during the reporting periods, leading to potential mismatches between revenue and related expenses, thereby distorting the financial performance of a company engaged in long-term projects.