Presentation

In this lesson

1. 0:00 Revenue recognition over time explained
2. 1:11 Four-step approach to contract accounting
3. 2:03 Step one: calculating overall profit or loss
4. 2:32 Step two: measuring contract progress
5. 3:38 Step three: recognising revenue in P&L
6. 4:38 Step four: recording in statement of financial position
7. 5:09 Builder Co worked example setup
8. 6:17 Builder Co: calculating profit and progress
9. 8:06 Builder Co: financial position and contract liability
10. 10:10 Castle Co loss-making contract example
11. 11:22 Loss-making contracts: immediate recognition rule

About this lesson

You'll discover how to calculate overall contract profit or loss, measure progress using input or output methods, recognise revenue and expenses in the statement of profit and loss, and correctly present contract assets or liabilities in the statement of financial position. This is essential for SBR and AFM papers, where revenue recognition under IFRS 15 is regularly tested. Through two worked examples—one profitable construction contract and one loss-making contract—you'll see how to handle variable consideration, determine percentage completion, and apply the onerous contract provisions under IAS 37 when losses arise. The four-step process forms the backbone of revenue recognition for long-term contracts. Step one requires calculating total profit by taking the contract price and deducting all costs incurred to date plus estimated costs to completion. Step two involves determining progress, typically measured by either the input method (costs incurred as a proportion of total costs) or the output method (work certified as a proportion of total contract value). Step three focuses on recognising the correct revenue and cost of sales in the profit and loss account, adjusted for amounts previously recognised in prior years. Step four ensures you record the resulting contract asset or liability in the statement of financial position—a contract asset when you've earned more revenue than you've invoiced, and a contract liability when you've invoiced more than you've earned. The key distinction emerges when dealing with loss-making contracts. Profitable contracts allow you to recognise profit gradually according to percentage completion, spreading gains across accounting periods. Loss-making contracts, however, must be treated as onerous contracts under IAS 37, requiring immediate recognition of the entire loss as soon as it becomes known. This protects financial statements from overstating asset values and ensures prudence. By mastering this approach, you'll confidently handle complex revenue scenarios and earn marks on case study and objective test questions that test your understanding of performance obligations and financial statement presentation.

Duration: 12m