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# Revenue Recognition in a Large Multinational Firm

Halibut Corp. ("HC") is a large multinational engineering and construction firm. One of its major activities is to construct large-scale infrastructure projects such as bridges, highways, dams and desalinization plants. HC is currently starting the construction of a large desalinization plant in Qatar.

Details regarding the projects costs and the percentage of the project that will be completed at the end of each fiscal period are outlined in below:

year 2010 2011 2012 2013
during the fiscal year 5,000,000 7,500,000 9,500,000 4,000,000
% comp each year 12% 38% 40% 10%

HC will receive \$31,000,000 to build the desalinization plant, from which it must pay all costs of construction. Please assume that when using the engineering firm's estimates for the % of completion method that the "costs incurred during the fiscal year" also represent the costs estimated to complete the contract, at any given point
Required:
1. Using the percentage of completion method, calculate the amount of revenues, costs and gross profit that would be recognized in each fiscal year using: a) costs; and b) the engineering firm's estimates to determine the % of the project that is completed.
2. Assume that HC has decided to recognize revenue and costs based on the engineering firm's estimates regarding the percentage of the project that is completed at each fiscal year end. Construction of the desalinization plant went according to plan in 2010 and 2011. However, during fiscal 2012, due to decreasing costs of labour and fuel, management has revised its expected costs downward for 2012 and 2013. Accordingly, the costs to construct the desalinization plant are revised, such that costs to complete the project are estimated to be \$8,000,000 and \$3,250,000 for fiscal 2012 and 2013, respectively.
i) Calculate the amount of revenue, costs and gross margins to be recorded in 2012 and 2013;
ii) Revise the amount of revenues, costs and gross profits recognized in 2010 and 2011, if necessary, or explain why an adjustment of the revenues, costs and gross profits are not required.
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#### Solution Summary

Revenue recognition in a Large Multinational Firm is examined.

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