Percentage-of-completion revenue (input and output methods)
What is percentage-of-completion revenue, and why can profit run ahead of cash?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Percentage-of-completion revenue is recognised on a long contract in step with the work performed; under IFRS 15 (AASB 15, NZ IFRS 15) and FRS 102 from 2026, it is revenue recognised over time where the contract meets the standard's tests, measured by an input method such as costs incurred against total expected costs or an output method such as surveyed work. On a US$10m contract expected to cost US$8m, with US$4m spent, the contractor books US$5m of revenue and US$1m of profit, whatever it has billed. If expected cost rises to US$10m with the same US$4m spent, that US$1m reverses, so a lender watches for estimates revised late.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// THE FULL PAGE
Percentage-of-Completion Revenue: a Worked Example →
The profit is an estimate until the last claim is paid.
// WHAT IT IS NOT
A contract asset is the balance-sheet result when revenue recognised this way runs ahead of what the contract allows to be billed; percentage of completion is the method that produces it.
// WORKED IN
// NEXT TO IT
THE ACCOUNTS AND THE AUDIT FILE
- Going concern
- Management accounts
- Related-party transactions
- Capitalised costs
- Contingent liabilities
- Bank confirmation (audit)
- Qualified audit opinion
- Subsequent event
- Debt classification on a covenant breach
- Shareholder current account
- Contract assets (unbilled revenue)
- Right-of-use asset and lease liability (IFRS 16)
- Customer prepayments (deferred income)
- Window dressing (period-end debt)
- Intercompany balances
- Doubtful debts provision (expected credit loss allowance)
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