percentage-of-completion method

Percentage-of-Completion Method

In construction and project finance, a method for calculating profits and losses in which revenue is recognized as it is received, provided that it is prorated according to the percentage of the project that is complete. This differs from the completed-contract method, which only recognizes revenues after the physical completion of the contract. Each method may have its own tax advantages.

percentage-of-completion method

A method of recognizing revenues and costs from a long-term project in relation to the percentage completed during the course of the project. Thus, the percentage-of-completion method allows a business profits (or losses) on a project before its completion. Compare completed-contract method.
References in periodicals archive ?
On May 8, 2015, Toshiba disclosed that, in the course of an investigation, a Special Investigation Committee had identified several instances in which the Company used a percentage-of-completion method of accounting, wherein contract costs for certain infrastructure projects were undervalued and contract losses (including provisions for contract loss) were recorded in an untimely manner.
GAAP requires the percentage-of-completion method unless reliable estimates cannot be made.
The difference in the income that would have been recognized under the percentage-of-completion method over that recognized on the completed-contract method is normally an AMT adjustment item.
Contractors who use the percentage-of-completion method (see main article) need to "look back" when the contract is done.
Common fraud techniques include certain "channel stuffing" (for example, shipping inventory in excess of orders, or providing special incentives to customers to purchase more inventory than is now needed, in exchange for future discounts and other benefits), reporting revenue after goods are ordered but before they are shipped, improper year-end cutoff procedures, reporting revenue when significant services are still to be performed or goods delivered, and improper use of the percentage-of-completion method.
The IRS valued the inventory at the cost of producing it plus a profit estimated by management and applied to a percentage-of-completion method.
Because there is little if any deferral of income under the percentage-of-completion method (particularly where progress payments are scheduled to effectively shift the interest cost to the contracting customer), the regulations could provide that for purposes of section 460(c)(3) that, where 100 percent of the contract is accounted for under the percentage-of-completion method, a contract shall be deemed not to be a long-term contract.
The Company's plan of compliance will explain that, as previously reported, due to the complexities and complications associated with the restatement of its financial statements to recognize revenue from sales of its solar photovoltaic systems using the percentage-of-completion method rather than based upon multiple deliverable elements, the Company was not able to file its Quarterly Report on Form 10-Q for its fiscal 2012 third quarter ended December 31, 2011 within the 5-day extension period afforded by SEC Rule 12b-25, which ended February 14, 2012.
460 purposes, retainages are included in the total contract price when determining the formula under the percentage-of-completion method in Sec.
For long-term projects, which the IRS defines as any project that isn't completed within one taxable year, contractors must use the percentage-of-completion method of accounting.
This Alert documents "best practices" for auditing construction contractors and companies using the percentage-of-completion method of accounting.
Any income item that was taken into account properly during the recognition period under the completed-contract method is recognized as built-in gain to the extent it would have been included in gross income under the percentage-of-completion method before the first day of the recognition period.