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<p>Whereas actual physical completion shows more % of completion then derived by the percentage completion method?What are the ways of recognizing expenses and income for a contracting firm which is involved in MEP activities, where material and equipment's have70 to75% share compare to labor which is20 to15 % ? What kind of financial statement notes to be prepared to take into account in regards to variations which are pending approval?</p>
I agree with the answer given by Kashif Pirzada Assistant Finance Manager
Since Percentage of completion method relies on the matching principle of revenues and expenses in the relevant accounting period and provides accurate picture in P&L. However, this method can overstate revenue and GP if the expenditure are recognized before they contribute to completed work.
If the actual % of completed work is more than the derived completed work then there must be a missing cost which is not allocated to the project such as subcontractor cost.
Costs are accumulated in an asset account (CIP) and on the basis of CIP account revenue and GP are recorded for respective year. Revenue can be recognized through following formula.
Revenue recognition = % of work complete in the period * total contract value
% of work complete = Expenditure incurred till date / total estimated cost of the contract
Since the variation orders are not approved and have no effect on the total contract value, there is no need to take these into consideration and mention in the footnotes.
