Recognize performance over time only after proving the path

Cost cannot measure progress until the obligation qualifies for over-time recognition and the selected input faithfully depicts transfer. Linden Peak has incurred 55 percent of expected installation cost by year-end, but its project accountant has not established either condition before recognizing 55 percent of installation revenue.

Prove an over-time criterion

Test the performance obligation against each path:

1. the customer simultaneously receives and consumes benefits as Linden Peak performs;
2. performance creates or enhances an asset the customer controls as created; or
3. performance creates an asset with no alternative use to Linden Peak and Linden Peak has an enforceable right to payment for performance completed to date.

Routine monthly support often follows the first path because another provider would not need to reperform prior stand-ready service. A system installed on a customer-controlled site may follow the second. A highly customized device may have no practical alternative use, but that fact alone does not supply an enforceable right to cost plus a reasonable margin on termination. Read the contract and relevant law.

The current case stipulates support transfers evenly over thirty-six months. It also stipulates installation transfers at completion, so the 55 percent cost ratio cannot accelerate installation revenue.

Select a faithful measure

For a qualifying over-time obligation, evaluate output evidence such as units, milestones, surveys, or elapsed service and input evidence such as labor hours or cost. Exclude or adjust:

• abnormal waste and inefficiency that do not depict performance;
• significant uninstalled materials whose cost arrives before related transfer;
• inputs disproportionate to the entity's performance; and
• activities that prepare to perform but do not transfer a benefit.

Use one method for one obligation and apply it consistently. A milestone that triggers billing is not automatically a faithful output measure.

Calculate cumulative and current revenue

The following is a separate cost-to-cost drill, not a fact in Linden Peak's $126,000 device-and-support case. Assume a $600,000 allocation, a qualifying cost-to-cost input method, expected eligible cost of $480,000, eligible cost incurred of $192,000, and $210,000 recognized previously. Progress is 40 percent; cumulative revenue is $240,000; current revenue is $30,000. If the expected eligible cost changes, recompute the cumulative estimate and recognize the current effect. Preserve excluded waste and uninstalled materials in separate lines.

Progress challenge

For the cost packet above, add $96,000 of expensive equipment delivered to the site but not installed, with no margin earned on procurement. Show why an unadjusted 60 percent cost ratio misstates performance, state the method adjustment, and identify the control evidence the calculation still cannot prove.

First follow the Harbor fabrication example. Then complete the independent progress practice.