Repost from my old posting on Revenue recognition for construction companies:
Under accounting standard, revenue for construction is recognised normally under % of completion basis. (page 32 of the financial report has this full policy explained:
For fixed price contracts, construction contract revenues and expenses are recognised on an individual contract basis using the percentage of completion method. Once the outcome of a construction contract can be estimated reliably, contract revenues and expenses are recognised in the Statement of Profit or Loss and Other Comprehensive Income in proportion to the stage of completion of the contract. The stage of completion is measured by reference to actual costs incurred to date as a percentage of estimated total costs for each contract.)
To explain it simply:
If they are building a $100 million building, and they think the cost will be $80 million. And this year they have spent $40 million on the building, they would assume that the building is 50% completed.
Thus revenue recognized will be 50% x $100 million = $50 million, and they make $50m - $40m = $10m profit before overhead.
But this is a rough estimate. Will the house be truly worth $100 million? Is the construction really 50% completed?
DGX Price at posting:
3.9¢ Sentiment: None Disclosure: Not Held
