Major equipment arrived before installation: review the cost-to-cost progress measure

A major equipment delivery can cause project costs to jump even when installation has barely begun. If revenue is measured using costs incurred as a proportion of expected costs, that delivery can also move reported progress sharply. The accounting question is whether the cost movement depicts the transfer of the promised work to the customer.

Bring the item to the accountant before accepting the spreadsheet's automatic completion percentage. Provide the equipment value, procurement role, customer-control evidence and work still required. A warehouse receipt, supplier payment or stored-materials billing certificate is useful evidence of a particular event, but none independently resolves every revenue-recognition condition.

This guide prepares an operational evidence file for an IFRS assessment. It assumes the accountant has already established the performance obligation and whether revenue qualifies for recognition over time. Businesses using another framework need their own accounting assessment. Do not apply the example merely because a construction contract contains expensive materials.

Paragraph B19 of IFRS 15, reproduced in NZ IFRS 15, addresses adjustments when costs do not appropriately depict performance. Its uninstalled-goods example concerns a good that is not distinct, passes to customer control significantly before related services, and represents a significant share of expected costs. The entity procures it from a third party without significant design or manufacturing involvement, while acting as principal. The expectations are assessed at contract inception.

The possible result is recognition of revenue equal to that good's cost, with the remaining progress measure adjusted. It is not a general permission to remove any inconvenient cost from the denominator. The accountant must evaluate the facts and document why the treatment applies to the identified performance obligation.

Prepare an item-specific evidence note instead of copying the conclusion from another project. An equipment package designed substantially by the contractor may differ from a standard item it procures. An item that forms a distinct performance obligation may require a different analysis. Record these differences before building the numerical schedule.

Assemble the relevant contract provisions, delivery and acceptance records, location, identification of the goods, and restrictions on substitution or redirection. Ask the project and contract owners to explain what each record establishes. Paying the supplier proves a cash event; it does not alone show when the customer obtained control.

Identify installation, testing and acceptance work that remains. A unit may sit on the customer's site while significant contractual conditions remain unresolved. Conversely, the physical location alone may not explain all control considerations. Preserve uncertainties for the accountant and legal adviser where contract interpretation is needed rather than marking control transferred from a delivery date alone.

Keep the evidence linked to the exact equipment or lot. If part of a shipment has transferred and another part has not, a single purchase-order total can obscure the distinction. The supporting schedule should identify which costs the reviewer accepted for the assessed treatment and which remain outside that population.

Consider a hypothetical contract with a reviewed transaction price of $1,000,000 and total expected costs of $800,000. A third-party equipment item costs $300,000, leaving $500,000 of other expected costs. At the reporting date, that equipment cost and $100,000 of other costs have been incurred. Assume the accountant concludes that the specific B19 uninstalled-goods treatment is appropriate and that customer control of the equipment has transferred.

An unadjusted cost-to-cost calculation would divide $400,000 by $800,000 and show 50% progress. Applied to the full price, it would produce $500,000 of revenue and $100,000 of margin against the $400,000 cost. That is the starting calculation being questioned, not the approved result for these assumed facts.

For the reviewed treatment, measure progress on the remaining work as $100,000 divided by $500,000, or 20%. Recognize $300,000 of revenue equal to the equipment cost, then apply 20% to the remaining $700,000 of contract revenue. That adds $140,000, giving total cumulative revenue of $440,000 and cumulative margin of $40,000.

The adjustment reduces revenue and margin by $60,000 compared with the unadjusted calculation. It does not remove the $300,000 equipment cost from the project entirely. The schedule still shows that cost and its corresponding revenue, with no margin attributed to that component at this stage under the stated assumptions.

Keep cumulative and current-period figures separate. If other incurred costs later rise from $100,000 to $300,000 while their total estimate remains $500,000, the remaining-work progress becomes 60%. Under the same hypothetical assumptions, cumulative revenue becomes $300,000 plus 60% of $700,000, or $720,000.

The additional revenue since the prior $440,000 position is $280,000. Additional other costs are $200,000, so the period's margin is $80,000 and cumulative margin is $120,000. Posting the full $720,000 again would duplicate previously recognized revenue. Retain the prior approved schedule and the movement between reporting dates.

Reassess actual estimate changes through the established accounting process. A revised installation cost, approved price change or new fact about the equipment can affect the calculation. Do not preserve a convenient percentage after its assumptions change. Identify which input changed and let the reviewer determine the reporting effect and applicable period.

A customer may have been billed $500,000, $350,000 or another amount under the payment schedule. That amount belongs in the billing and contract-balance reconciliation. It does not replace the reviewed $440,000 revenue calculation in the first example merely because it appears on a certified progress invoice.

Show cumulative billings, receipts, retainage and accounting revenue in separate columns. Explain the resulting differences under the company's reporting policy. This lets the project team discuss collections without treating unpaid revenue as an invoicing mistake or treating an advance bill as proof of completed work.

Also separate this assessment from the customer's accounting for its purchased asset. The contractor's measure of revenue progress and the customer's decision about capitalizing or depreciating equipment are different questions. The same delivery evidence may be relevant to both parties, but one party's approved entry does not determine the other's treatment.

The final file should identify the contract and performance obligation, assessed equipment population, control evidence, procurement facts and approved accounting conclusion. Attach the cost schedule, remaining-cost estimate and transaction-price support used in the calculation. Preserve the versions so a later reviewer can reproduce the reported progress at that date.

Explain excluded items and unresolved facts explicitly. If an item has not transferred to customer control, do not force it into the example's zero-margin revenue line. If costs relate to inefficiency or another issue, route them through their appropriate assessment rather than labeling everything uninstalled materials.

Have the accountant approve the financial treatment and the project owner approve the operating facts and remaining-work estimate. The useful handoff is a calculation whose inputs and limits are visible. It allows a major procurement event to be reported accurately without making it stand in for installation work that has not yet occurred.