Over-time revenue: wasted cost does not mean more work delivered
A project has incurred £24,000 of productive cost and £6,000 of unexpected wasted materials. Counting all £30,000 as progress would recognise revenue for work the customer did not receive. IFRS 15 requires a cost-based input measure to exclude inputs that do not depict performance. The wasted cost can still remain an expense.
Establish over-time recognition before calculating a percentage
IFRS 15 paragraph 35 sets the criteria for recognising a performance obligation over time. A long contract, regular invoices or a large amount spent does not by itself meet those criteria. The example here assumes the customer controls the asset as it is enhanced, satisfying paragraph 35(b).
Once an obligation qualifies, paragraphs 39 to 42 require the progress measure to depict performance transferred to the customer. Choose an input or output method that fits the promised goods or services, apply it consistently to similar circumstances and update progress at each reporting date.
This guide uses UK-adopted full IFRS for a 2026 annual period, without early adoption of IFRS 18. It considers one fixed-price performance obligation with a cost-based input method that faithfully depicts ordinary productive progress. It is not a general rule that revenue equals spend divided by budget.
Application guidance B18 and B19 requires adjustment for inputs that do not depict performance. Significant unexpected inefficiencies, including wasted materials not reflected in the contract price, cannot increase revenue merely because the costs were charged to the project.
Keep wasted expenditure out of both progress amounts
All amounts are hypothetical and exclude taxes. The contract price is £100,000. Expected productive cost for the whole obligation is £80,000: £24,000 for productive work completed plus £56,000 for productive work still required. No revenue has previously been recognised.
Unexpected, significant wasted materials cost a further £6,000. That waste was not reflected in the selling price and provided no additional performance to the customer. All £30,000 incurred is expensed; none qualifies as a recoverable cost asset. There is no price change, variable fee, financing, special material adjustment or contract loss.
Total forecast expenditure is therefore £86,000. For the progress measure, exclude the waste from both incurred and total expected inputs. Productive progress is £24,000 / £80,000 = 30%, giving cumulative revenue of £30,000.
Expense remains £24,000 of productive cost plus £6,000 of waste, or £30,000. Profit for these events is zero. Excluding waste from progress does not reverse or defer its expense.
| Calculation | Result | Meaning |
|---|---|---|
| £24,000 / £80,000 | 30% | Productive progress |
| £100,000 × 30% | £30,000 | Cumulative revenue |
| £24,000 + £6,000 | £30,000 | Current expense |
| £30,000 − £30,000 | £0 | Current profit |
Sources and context, checked :
Reconcile the entries and the overstatement
Assume the consideration remains conditional. Record Dr contract asset £30,000; Cr revenue £30,000. For the incurred costs, record Dr project expense £30,000; Cr bank or payables £30,000. If the £6,000 waste is already in the ledger, do not post it a second time.
An unadjusted calculation would use £30,000 / £86,000 = 34.8837%, giving £34,883.72 of revenue. Revenue and profit would be £4,883.72 too high. If that amount is already booked in the assumed balances, correct it with Dr revenue £4,883.72; Cr contract asset £4,883.72.
Using £30,000 / £80,000 is also wrong. It combines a numerator containing waste with a denominator excluding it. The schedule must explain which costs depict performance and use that assessment consistently.
At the next close, revise the remaining productive cost estimate and calculate cumulative revenue again, then deduct revenue already recognised. Paragraph 43 treats changes in the progress measure as changes in accounting estimates. A new forecast does not justify selecting a percentage that produces a preferred margin.
Sources and context, checked :
Check materials and unreliable estimates separately
Purchased materials are not automatically waste. IFRS 15 B19 contains separate conditions for an adjustment that recognises revenue at cost for certain significant uninstalled goods. Those conditions include early customer control of a non-distinct third-party good and the seller not being significantly involved in its design or manufacture. Do not remove every large material purchase using the waste example.
Reliable measurement matters too. Paragraphs 44 and 45 address cases where progress cannot yet be reasonably measured. If the entity expects to recover costs, revenue is recognised only to the extent of costs incurred until it can reasonably measure the outcome. That is a conditional rule, not a substitute for obtaining a credible forecast.
For the close file, reconcile incurred costs to the ledger, identify waste and other inputs that do not depict performance, and support the productive effort remaining. Compare the resulting percentage with the work actually transferred to the customer. Resolve an unexplained difference before using the percentage to post revenue.