Revenue Recognition for Construction

Most common accounting practices for revenue recognition is by invoice method but for recognizing revenue for construction companies the common and most acceptable method is progress method which could be computed base on its project completion.

E.g. Contract Value $ 1,000,000.00
Contractors Margin is 85% ($ 850,000.00) or total estimated cost

Invoice 1 : $ 200,000.00
Cost : $ 150,000.00

To compute the revenue

Cost Incurred (Current) / Total Estimated Cost = Percent Complete (Current Period) x Total Revenue = Revenue Recognized (Current Period)

Revenue = $150,000/850,000 x 1,000,000 = $176,471.00

GAAP has carved out a special niche for construction contractors. While there is no FASB Statement for this area, AICPA Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts, (1955) and AICPA Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, (1981) address it specifically. There is also an excellent AICPA Audit and Accounting Guide, Construction Contractors (see Resource IND 1).

Because most construction contracts by their nature are long-term, the underlying accounting principle known as matching — expenses follow revenues — would be violated if the revenue from the contract were recognized upon contract execution or sale of the services. There are two methods of revenue recognition are allowed under the preceding pronouncements for construction contractors.
One is percentage of completion (PC) method and the other is completed contract (CC) method. Under the PC method, the construction contractor recognizes revenue over the life of the construction contract based on the degree of completion: 50% completion means recognition of one-half of revenues, costs, and income. Under the CC method, all revenues, costs, and income are recognized only at completion of the construction project, ordinarily at the end of the construction contract.

SOP 81-1 requires that the PC method be used in lieu of the CC method when all of the following are present:

1. 1. Reasonably reliable estimates can be made of revenue and costs;

2. 2. The construction contract specifies the parties’ rights as to the goods, consideration to be paid and received, and the resulting terms of payment or settlement;

3. 3. The contract purchaser has the ability and expectation to perform all contractual duties; and

4. 4. The contract contractor has the same ability and expectation to perform.

The CC method is used in rare circumstances, which are set forth in SOP 81-1 to be any of the following:

1. 1. The contract is of a short duration (not defined), Such as 24 months or less. As a result, the recognized revenue would not differ under the PC or CC methods;

2. 2. The contract violates any one of the items 1 through 4 above; or

3. 3. The contract’s project exhibits documented extraordinary, nonrecurring business risks (such as extinguishing oil well fires in a country while hostilities are continuing).

In applying these revenue recognition methods, it is important that the following five items be kept in mind:

• Generally, each construction contract is treated as a profit center, with its own revenues, costs, and income. There are, however, circumstances in which multiple contracts, change orders, or options, for example, create the issue of whether to combine contracts into one profit center or to segment the contracts into separate profit centers.

SOP 81-1 sets forth the criteria for combining and segmenting construction contracts. As a general rule, the more interrelated and cohesive a project — for example, through substantial common costs, a single buyer, or concurrent performance of steps in the project — the more the scales tip in favor of combining. In contrast, when 1) separate project components have bids distinct from the entire project; 2) the buyer may choose to accept any, all, or more of the bids; and 3) the components of the project have the approximate revenues, costs, and income of a stand-alone project, then segmenting the contract is permissible. For such segmentation, SOP 81-1 has additional requirements that should be reviewed.

• GAAP requires that the accrual method be used for all reported billings and costs and losses.

• Cost allocation is based on direct and indirect costs as well as construction period interest.

• Assets are represented by underbillings (estimated costs and earnings exceed billings) whereas liabilities are shown as overbillings (billings exceed estimated costs and earnings).

• Consolidation theory applies to investments in construction projects or ventures per AICPA ARB No. 51, Consolidated Financial Statements; FASB Statement No. 94, Consolidation of All Majority-owned Subsidiaries — an amendment of ARB No. 51, with related amendments of APB Opinion No. 18 and ARB No. 43, Chapter 12; and, most importantly, APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Because of potential changes in this area, the AICPA website and FASB website should be consulted.

There are several modifications to revenue recognition rules for government contractors. These modifications should be reviewed by those engaged in federal government contracting.


Junior Philippine Institute of Accountants (JPIA)


Welcome to JPIA Online!..

What is JPIA?

JPIA stands for stands for Junior Philippine Institute of Accountants (JPIA).

The Junior Philippine Institute of Accountants (JPIA) represents the world for the young accountants in the Philippines. JPIA is an organization established to develop its members as responsible, well-rounded individuals. It is likewise instituted to promote, to organize, and to coordinate activities for the welfare of the students and to nurture them not just a good student in their respective campuses but to their community as well. JPIA aims for solidarity and harmony among its members. It also aims to involve the members in all its activities by ensuring their active participation from the planning to the implementation stage. JPIA is a special and highly esteemed organization of the Philippines which is created only and exclusively for the students of Bachelor of Science in Accountancy (BSA) course in the exclusive public and private colleges and universities of the country which are granted an approval and accreditation from the college and university standards governing authority of the Philippines, the Commission of Higher Education (CHED).

It such called a very special organization for the BS Accountancy students because of the highest standards sets to the colleges and universities by the government to offer such course. Students who are admitted to take the course of Bachelor of Science in Accountancy have passed series of tough and thorough screening and examinations in different stages of their level. More often, Accountancy students in the Philippines are considered as the group of bright and genius student for surviving the screenings and tough examinations.


JPIA envision as a professional student organization that serves as the training ground in the development of member through quality activities promoting dynamic interaction and well-roundedness of members. JPIA aims to develop dynamic, honest, God abiding, young professionals in the field of accountancy.


JPIA commit themselves for the fulfillment of their vision so that we may become competent, responsible, and dynamic and God abiding accountants responding to the challenges of the time.

ACCOUNTANCY SCREENING PROCESS (Philippine Government Standards)

For the freshmen

  • Medical Examination (Student must be physically and mentally fit to enroll the course)
  • GPA during High school must be very good
  • Must have a good moral character (This is required in performing their actual jobs. Philippine Accountants must be honest, independent and with high integrity)
  • Must passed the college/ university entrance test
  • Must have a higher to highest score in the college / university entrance test
  • Must passed the qualifying test for the Bachelor of Science in Accountancy (BSA) course.

    In the test, it is required that the applicant must have to passed at a high rating for the major subjects intended for BSA Course including; Algebra, trigonometry, calculus, physics, chemistry and other semi major subjects . Failure of this requirement would not be admitted to take Bachelor of Science in Accountancy while passing the required procedure could not directly enroll for the course of Bachelor of Science in Accountancy but only for the first step. The door is open for them to enroll Associate in Accountancy Course.

    They could have the chance to become a member of JPIA if they will survive the first 2 semester.

For the juniors & sophomores

  • Juniors and sophomores are eligible to be a member of the Junior Philippine Institute of Accountants (JPIA)
  • After 2 year of study for the Associate in Accountancy Course, they must have to take a qualifying examination for the next level. This test is more getting harder to test the student’s ability and learning with the course.
  • The examination is a qualifying examination for Bachelor of Science in Accounting Technology (BSAT).
  • The test is a qualifying examination for Bachelor of Science in Accounting Technology (BSAT)
  • Failure to pass the qualifying examination; the student would be advice to shift to another business related course such as Bachelor of Science in Marketing, Management, Economics and Finance. Since BS in Accountancy has a semi major in Management, Economics, Marketing and Finance, student who failed to passed the qualifying exam would be consider as feeble enough to survive for the different semi majors plus the full major of Accountancy and business laws.

For seniors

  • Preliminary requirements to take the final stage are another qualifying examination for the course of Bachelor of Science in Accountancy (BSA).
  • This is the final stage of this course.Failure to pass the qualifying test for the BSA course would not allow them to continue for the BS Accountancy so their final highest achievement for accounting study is just Bachelor of Science in Accounting Technology (BSAT)..
  • After graduation of the BSA course, the student could have a Special Order (S.O.) from the Commission on Higher Education (CHED), which S.O. would be reflected in their Diploma, Transcript of records and a recognition and requirement for them to be allowed to take the Certified Public Accountant Licensure Examination (CPA – LE).
  • Passing the CPA – LE will make them a Certified Public Accountant or CPA

    For more information about the JPIA Philippines,

Please join the JPIA online Network


Please contact us:

Junior Philippine Institute of Accountants (JPIA)

Email the webmaster at:

More Sources (Links)

(PICPA) Philippine Institute of Certified Public Accountants
Association of Philippine CPAs providing Accounting information and updates to CPAs

(NFJPIA) National Federation of Junior Philippine Institute of Accountants
Association of Bachelor of Science in Accountancy students in all Universities and Colleges in the Philippines

Board of Accountancy
Professional Regulation Commission | Board of Accountancy
Government Regulations for practicing accountancy

(JPIA) Junior Philippine Institute of Accountants
Association of Bachelor of Science in Accountancy students in all Universities and Colleges in the Philippines