What is Percentage of Completion Method?
The percentage of completion method is a revenue recognition technique used for long-term contracts where revenue is recognised over time, in proportion to the work performed. Under IFRS 15, an entity uses an input method (such as cost incurred to total cost) or an output method (such as physical milestones) to measure progress.
How It Works
- Confirm the contract qualifies for revenue recognition over time under IFRS 15.
- Choose an input or output method to measure progress.
- Calculate the percentage of completion at each reporting date.
- Recognise revenue, cost of sales, and profit in proportion to completion; record any expected loss in full immediately.
Saudi Context
Saudi construction firms, contracting Vision 2030 projects, and IT system integrators apply percentage of completion. Auditors test progress estimates carefully because revenue recognition has zakat and tax implications. ZATCA accepts the IFRS 15 percentage of completion method when properly documented.
Example
A Saudi contractor signs a SAR 30 million construction contract. By year-end SAR 12 million of estimated SAR 24 million total cost is incurred (50% complete). It recognises SAR 15 million revenue and SAR 12 million cost, for SAR 3 million gross profit in the year.