Synthetic; ₹ crore; modeled on how L&T describes its EPC accounting. Read the revenue note in L&T's annual report for the real-world wording. Deshmukh Infra Ltd wins a ₹600 crore road project lasting 3 years, with an initially estimated cost of ₹480 crore. The asset is built on the customer's land, and the customer controls it as it's created. So revenue is recognized over time, using the cost-to-cost input method: % complete = cumulative cost incurred ÷ total estimated cost. Industry people still call this percentage of completion (POC). That label survives from the old standards (IAS 11 / AS 7 / ASC 605-35). Under the new standard the mechanics are the same idea, now justified through the control test.
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Cost incurred in year (₹ cr) | 144 | 192 | 189 |
| Cumulative cost (₹ cr) | 144 | 336 | 525 |
| Total estimated cost (₹ cr) | 480 | 525 (revised) | 525 (actual) |
| % complete (cum. cost ÷ total est.) | 30% | 64% | 100% |
| Cumulative revenue (% × ₹600 cr) | 180 | 384 | 600 |
| Revenue for the year | 180 | 204 | 216 |
| Gross profit for the year | 36 | 12 | 27 |
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How does the contract play out year by year?
Year 1 is clean. 144/480 = 30%, so revenue is 180 and profit 36, the estimated 20% margin. In Year 2 the cost estimate rises to ₹525 crore and the margin compresses. The standard's answer is the cumulative catch-up. You recompute cumulative revenue and profit on the new estimate and push the entire correction through the current period. Cumulative profit should now be 64% × (600 − 525) = ₹48 crore. ₹36 crore was already booked, so Year 2 shows only ₹12 crore of profit on ₹204 crore of revenue. That's a 5.9% margin year, even though the contract margin is now 12.5%. Here's the analyst's lesson: lumpy EPC margins are often estimate revisions, not operations. Read the contract-estimates note. And if the revision had pushed total cost above ₹600 crore, the whole expected loss would be recognized immediately. That's an onerous-contract provision under IAS 37/Ind AS 37, and US GAAP keeps equivalent loss-provision guidance.
Billings run on milestones: ₹150 / ₹210 / ₹240 crore across the three years. At the end of Year 1, cumulative revenue is 180 against 150 billed. That leaves a contract asset of ₹30 crore ("unbilled revenue"). At the end of Year 2 it's 384 against 360, a contract asset of ₹24 crore. Indian EPC contracts carry two more wrinkles. Mobilisation advances are billings ahead of work, so they're a contract liability. Retention money is the 5 to 10% held back until defect-liability periods lapse. It shows up as old receivables. They're contractual, and no one is delinquent. Check before you call them a red flag.
Point in time vs over time: the decision rule
Revenue is recognized over time if any one of three criteria holds:
- The customer simultaneously receives and consumes the benefit as the entity performs. Think of payroll processing, security, SaaS access, audit staffing. If another provider could step in mid-stream without redoing work, this test is met.
- The performance creates or enhances an asset the customer controls as it's created. Construction on the customer's site is the standard case, as with Deshmukh Infra above.
- The asset has no alternative use to the seller, and the seller has an enforceable right to payment for performance completed to date. Bespoke equipment with a termination-payment clause qualifies. Much of Indian IT's fixed-price development work rides on this test.
If a contract fails all three, revenue is recognized at a point in time, when control transfers. The control indicators are present right to payment, legal title, physical possession, risks and rewards, customer acceptance. No single indicator decides; control is the principle. Goods on consignment fail these tests. A company "shipping" to its own consignment agents hasn't sold anything. Remember Manpasand and channel-stuffing when you reach Phase 2.
How do you measure progress toward completion?
You measure progress toward completion with output methods (milestones, units delivered, survey of work) or input methods (cost-to-cost, labour hours). Cost-to-cost dominates EPC and fixed-price IT. Its weakness is obvious once you say it out loud. Spending money isn't the same as creating value, and buying steel early inflates % complete. So the standard excludes uninstalled materials and inefficiencies from the measure. Auditors, for their part, treat cost estimates as a key audit matter (KAM) for EPC companies. Infosys and TCS recognize time-and-materials work as billed (criterion 1). Their fixed-price work goes on cost-to-cost, following the logic of criterion 3. Their auditors flag fixed-price estimation in KAMs almost every year.