Revenue is not recognized merely because a sale occurred or cash was collected — it follows analysis of the contract and when performance obligations are satisfied.
Under the international standard on revenue from contracts with customers, revenue is not recognized merely upon sale or collection. It follows analysis of the contract with the customer. In short: revenue equals the amount an entity is entitled to in exchange for goods or services it has actually transferred to the customer.
A central question is when percentage-of-completion may be used to recognize revenue for service or construction contracts. Percentage-of-completion is not used simply because a property is under construction. First, one of three conditions must prove that the performance obligation is satisfied over time. If none applies, treatment is typically deferred income until delivery — then revenue when control transfers.
Condition 1 — The customer receives benefits as the entity performs
The customer benefits from the service at the same time it is performed — for example cleaning, maintenance, security or monthly consulting.
Condition 2 — The entity creates or enhances an asset the customer controls as it is created
The entity builds an asset and the customer controls it while it is being built — for example a contractor building on land owned by the customer.
Condition 3 — No alternative use + enforceable right to payment
This condition is especially important in real estate. Both parts must be met: (1) the asset has no alternative use to the entity — it cannot readily be redirected to another customer because of the contract or customer-specific specifications; and (2) the entity has an enforceable right to payment for performance completed to date, including an appropriate profit margin.
Only when one of these over-time criteria is met can percentage-of-completion support revenue recognition. Otherwise, caution — and deferral until control truly transfers — is the professional path.