Special Issues in Revenue Measurement

While accrual accounting is straightforward in firms which produce goods and sell them, there are special cases where accrual accounting can be complicated by the nature of the product or service being offered.
o Long term Contracts: Long term contracts span several accounting periods, and customers often make periodic payments as the contract progresses (Example : Home or Commercial Building). When a long term contractor has a contract with a buyer with an agreed upon price, revenue during the period of construction is recognized on the basis of the percentage of the contract that is completed. As the revenue is recognized on a percentage of completion basis, a corresponding proportion of the expense is also recognized. An alternative is to wait until the contract is completed, and recognized the total revenue and expense on completion. Since this delays the payment of income taxes, it is not permitted under the Internal Revenue Code for tax purposes.
o Uncertainty about cash collections: When there is considerable uncertainty about the capacity of the buyer of a good or service to pay for a service, the firm providing the good or service may recognize the income only when it collects portions of the selling price under the installment method. While this is similar to revenue recognition in the cash method, the expenses under the installment method are recognized only when the cash is collected, even though payment may be made in the period of the initial sale. An alternative to this approach is the cost-recovery-first method, where cash receipts and expenses are matched dollar for dollar (thus generating no profits) until all the expenses are covered, after which any additional revenues are reported as profits.