<Li> Returns: companies which cannot reasonably estimate the amount of future returns and / or have extremely high rates of returns should recognize revenues only when the right to return expires . Those companies that can estimate the number of future returns and have a relatively small return rate can recognize revenues at the point of sale, but must deduct estimated future returns . </Li> <P> This exception primarily deals with long - term contracts such as constructions (buildings, stadiums, bridges, highways, etc .), development of aircraft, weapons, and space exploration hardware . Such contracts must allow the builder (seller) to bill the purchaser at various parts of the project (e.g. every 10 miles of road built). </P> <Ul> <Li> The percentage - of - completion method says that if the contract clearly specifies the price and payment options with transfer of ownership, the buyer is expected to pay the whole amount and the seller is expected to complete the project, then revenues, costs, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion). For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract . This method is preferred . However, expected loss should be recognized fully and immediately due to conservatism constraint . Apart from accounting requirement, there is a need for calculating the percentage of completion for comparing budgets and actuals to control the cost of long term projects and optimize Material, Man, Machine, Money and time (OPTM4). The method used for determining revenue of a long term contract can be complex . Usually two methods are employed to calculate the percentage of completion: (i) by calculating the percentage of accumulated cost incurred to the total budgeted cost . (ii) by determining the percentage of deliverable completed as a percentage of total deliverable . The second method is accurate but cumbersome . To achieve this, one needs the help of a software ERP package which integrates Financial, inventory, Human resources and WBS (Work breakdown structure) based planning and scheduling while booking of all cost components should be done with reference to one of the WBS elements . There are very few contracting ERP software packages which have the complete integrated module to do this . </Li> <Li> The completed - contract method should be used only if percentage - of - completion is not applicable or the contract involves extremely high risks . Under this method, revenues, costs, and gross profit are recognized only after the project is fully completed . Thus, if a company is working only on one project, its income statement will show $0 revenues and $0 construction - related costs until the final year . However, expected loss should be recognized fully and immediately due to conservatism constraint . </Li> </Ul> <Li> The percentage - of - completion method says that if the contract clearly specifies the price and payment options with transfer of ownership, the buyer is expected to pay the whole amount and the seller is expected to complete the project, then revenues, costs, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion). For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract . This method is preferred . However, expected loss should be recognized fully and immediately due to conservatism constraint . Apart from accounting requirement, there is a need for calculating the percentage of completion for comparing budgets and actuals to control the cost of long term projects and optimize Material, Man, Machine, Money and time (OPTM4). The method used for determining revenue of a long term contract can be complex . Usually two methods are employed to calculate the percentage of completion: (i) by calculating the percentage of accumulated cost incurred to the total budgeted cost . (ii) by determining the percentage of deliverable completed as a percentage of total deliverable . The second method is accurate but cumbersome . To achieve this, one needs the help of a software ERP package which integrates Financial, inventory, Human resources and WBS (Work breakdown structure) based planning and scheduling while booking of all cost components should be done with reference to one of the WBS elements . There are very few contracting ERP software packages which have the complete integrated module to do this . </Li>

When should revenue be recognized on the income statement