Revenue Recognition policy of ABB
Company: ABB
Business: Power and others
Reference to annual Report of: 2010
Extract from Revenue recognition policy of the ABB:
1. Revenue Recognition when the cost can be measured
1.1 Revenue under long term construction contracts are recognized using percentage of completion method of accounting.
1.2 The Company principally uses cost to cost method of to measure progress towards completion of on the contracts under this method the progress on the contracts is measured by the actual costs incurred in relation to the best estimate of total cost in relation to the company. The cumulative effects of such adjustment are reported in current period.
2. Revenue Recognition when cost associated with revenue cannot be estimated:
2.1 Short term construction type contracts or long term construction type contracts for which reasonable dependable estimates cannot be made or for which inherent hazards make estimates difficult are accounted under completed contracts method.
2.2 Revenues under completed contracts methods are recognized upon substantial completion that is accepted by the customer, compliance with performance specifications demonstrated in factory acceptance test or similar events.
Author’s Remarks:
Explanation 1
Para 20 of IAS 18 on Revenue Recognition states that:
“When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period.
The outcome of a transaction can be estimated reliably when all the following conditions are satisfied
….. (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably….”
Para 21 of IAS 18 defines percentage completion as:
“The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. Under this method, revenue is recognized in the accounting periods in which the services are rendered.”
1.1 When costs are measurable the revenue is recognized under percentage completion method of accounting whereby the total profits of the contracts are appropriated in the proportion of work completed over the period of time.
1.2 When costs are not measurable the revenue is recognized under completed contract method of accounting where revenue is measured at the time of completion of contract as condition stipulated in clause ‘d’ of para 9 cannot be satisfied.
