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BASIC FACTS

Nailed It! Construction company is contracted to build a residential project for Village Apartments at a fixed price of $1,5 million. The estimated construction cost is $1 million, although design works will significantly incur more costs which then will make the initial price to rise. Standard materials will be used to construct residential apartments. The construction company has already made purchases and consequently incurred more costs in the process of constructing residential projects. Nailed It! has incurred $187,500 of direct costs in order to integrate the component parts into the Village Apartments construction project during the period of three months ending on December 31, 2011. The project was over budget as it was revised upwards from $1 million to $1,25 million (Nailed It! Construction, 1). The selection of adaptive method to apply when working out the cost involved in the project is an issue that needs to be addressed. The construction company needs to make decision on whether to use the input or the output method.

CRITERIA FOR RECOGNITION OF REVENUE

IFRS 15 income from contracts with clients has presented a standard revenue, which demonstrates that every element ought to perceive income in return to the exchange of guaranteed products or administrations with the client in an amount. The latter mirrors the idea to which the element is expected to be entitled due to this merchandise. Based on IFRS 15 truly, the execution commitment met the criteria of perceiving income after some time as it has satisfied one of the criteria given beneath: “The element’s execution does not make an advantage with an elective use to the substance, and the element has an enforceable ideal to installment for the execution finished to date.”

Essentially, Nailed It! Construction is obtaining material and utilizing it for the development of town flat and town loft building and need to pay just for that material utilized in the development and not required any payments on stock for the execution made forward (Nailed It! Construction, 2). When a construction takes a significant period of time to complete, the accounting for it is distributed over that time. Therefore, in the case with the three-month period being June, September, and December, the expenses and revenue can be reasonably determined so they meet the criteria of revenue recognition.

METHOD USED FOR RECOGNITION

If the construction is complete and the Villagers have not cancelled the contract, the revenue needs to be fully recognized at $1,5 milion. As the сomponent part of $250,000 is lost (not utilized in the project and not present in inventory), the cost is added to the project (Nailed It! Construction, 1). As such, the company ought to choose the best method in which to measure the performance obligation and identify revenue recognition. On the other hand, output measures are the methods which use the output achieved or produced till date in order to derive the percentage completed (e.g. the number of units produced, no floors ready till date in case of construction projects, the number of cubic yards of pavement laid on a highway contract, project milestones, etc.). This method measures the actual production completed when compared to the final output or production. Once the completion percentage is determined using the output measures, the revenue is recognized for each period as stated in above-mentioned methods. The criteria are set to be able to identify revenue, and it should follow the method that has been selected by the organization. Therefore, the failure of the organization in identifying the profits should make the company to recognize revenue based on the recoverable costs that have been incurred in the process of constructing residential apartments.