Question

When IFRS uses the cost recovery method to account for a long-term contract,

Multiple Choice
a-Revenue typically is recognized in excess of costs incurred early in the life of the contract.
b-Costs in excess of revenue are typically recognized early in the life of the contract.
c-Revenue equal to costs are typically recognized early in the life of the contract.
d-Revenue is based on contract completion, not on costs, early in the life of the contract.

Answer 1

Under IFRS, revenue is recognized based on contract completion, not on costs, early in the life of a long-term contract.

Step-by-step explanation:

The correct answer is d-Revenue is based on contract completion, not on costs, early in the life of the contract.

Under the International Financial Reporting Standards (IFRS), the cost recovery method is used to account for long-term contracts. According to this method, revenue is recognized based on the completion of the contract, rather than the costs incurred. In other words, revenue is recognized as the contract progresses and milestones are achieved, regardless of the costs incurred at different stages of the contract.

For example, if a construction project has a contract value of $1 million and is expected to be completed in 2 years, the revenue recognition under the cost recovery method would be based on the completion of different stages of the project, such as the foundation, framing, and finishing. The costs incurred at each stage may vary, but the revenue recognized would be based on the completion of these stages.