ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue
Perla plc has a three-year contract to build a specialised asset for a single customer. The asset has no alternative use to Perla, and Perla has an enforceable right to payment for work completed to date, including a margin. Total expected costs are $9m, the price is $12m, and costs incurred to date are $3m. Which treatment is correct at the reporting date?
Revenue of $4m should be recognised over time. The asset has no alternative use and Perla has an enforceable right to payment, so the obligation is satisfied over time. Progress of one third of costs applied to the $12m price gives $4m.
- ARecognise revenue of $4m over time using a cost-based input methodCorrect
- BRecognise no revenue until the asset is delivered to the customer
- CRecognise revenue of $3m, equal to costs incurred, until the outcome is certain
- DRecognise revenue of $12m on contract signing
Explanation
The over-time criterion is met because the asset has no alternative use and Perla has an enforceable right to payment. Progress is 3/9, so revenue is 12m x 1/3 = $4m. Recognising only cost applies to the zero-profit approach, which is relevant only when progress cannot be reasonably measured.
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