Long-term Contract

1. Type 1: Long-term contract. How to calculate the revenue?

1. Method 1: Percentage of completion method::

1. There is a contract
2. There are reliable estimates of revenues, costs, and completion time
3. Two ways to estimate the completion percentage?
   • Engineering estimate of physical milestone(1/100个桥墩已经建好)
   • The ratio of incurred consts of total estimated cost

2. Method 2: Completed contract method::

1. There is NO contract
2. Or the estimated is unreliable
3. 只有在全部完成时再一次性付款

3. Comparison of 2 methods (POC vs CC):: | Financial statement | Item | POC | CC | — | — | — | — | Cashflow statement | Cash flow(only the final matters) | Same | Same | Income statement | Income Volatility(jitter) | Less | Greater | Income statement | Net income(early) | Greater | Less

2. Type 2: Installment contract. How to calculate the revenue?

1. Method 1: Installment sales method::

1. Cost of goods and service can be reliably estimated
2. And uncertainty of collection proceeds

2. Method 2: Cost recovery method::

1. Cost of goods and service CANNOT be reliably estimated
2. And uncertainty of collection proceeds(same)

3. Installment payment is different for GAAP vs IFRS::

1. For international IFRS, it recognize the discounted present value of installment payments. While the US GAAP doesn’t.

3. Higher level comparison between Longterm contract vs Installment contract

1. For Longterm contract, we use the cost percentage to calculate revenue. For installment, we use the percentage of reveunue to calculate cost.
2. For Longterm - CC methods, we don’t calculate until the last year. For installment - Cost recovery methods, we don’t given any netincome until the Expense(each year expense=revenue) has cover all