How to apply input and output methods to measure progress toward satisfaction of a performance obligation

When revenue is recognized over time under IFRS 15 and ASC 606, companies must determine how much progress has been made in fulfilling the performance obligation. The standard offers two categories of methods: input methods and output methods. The choice of method must faithfully reflect the transfer of control to the customer and be applied consistently. Selecting and implementing the appropriate method directly impacts revenue timing, contract asset/liability balances, and financial reporting quality.

Input methods measure effort or resources consumed in performance.

Input methods are based on the entity’s inputs to the satisfaction of a performance obligation, such as labor hours, costs incurred, or machine hours.

These methods assume that inputs correlate with progress in transferring control. They are best suited when:

• Outputs are not easily measurable

• The work-in-process is difficult to observe

• The project is resource-intensive

Common input methods include:

• Cost-to-cost: Compare costs incurred to total estimated costs

• Labor hours: Compare hours worked to total expected hours

• Resources consumed: Materials, machine time, or energy used

Example – Cost-to-cost method:

A company has a $1,000,000 contract and expects to incur $800,000 in total costs. At the reporting date, it has incurred $400,000.

Progress = 400,000 / 800,000 = 50%

Revenue recognized = 50% of $1,000,000 = $500,000

Dr. Contract asset               500,000  
    Cr. Revenue                             500,000

Important: Costs that do not depict progress (e.g., pre-contract mobilization, wasted materials) must be excluded from the calculation.

Output methods measure results delivered to the customer.

Output methods focus on the value transferred to the customer, such as units delivered, milestones reached, or surveys of work performed.

These methods are ideal when:

• Deliverables are clearly observable

• Customer benefit aligns with physical delivery

• Each unit provides standalone value

Common output methods include:

• Units delivered: Number of distinct products or components transferred

• Milestones achieved: Defined contract checkpoints

• Surveys of performance: Third-party or customer assessments

Example – Milestone method:

A construction firm has a 4-stage contract worth $4 million, and each stage is $1 million. Two stages have been completed by the end of the period.

Revenue recognized = 2 milestones × $1 million = $2 million

Dr. Contract asset               2,000,000  
    Cr. Revenue                             2,000,000

Important: Output methods must reflect actual value transferred. Delays or front-loaded billing should not drive premature recognition.

Selecting the appropriate method requires judgment and consistency.

Entities must choose the method that best depicts the transfer of control to the customer and use it consistently for similar performance obligations.

Criteria	Input Methods	Output Methods
Best for	Internal resource-intensive contracts	Deliverables with visible customer benefit
Key assumption	Effort = progress	Delivery = benefit
Data requirements	Cost estimates, time tracking	Deliverables, milestones, validations
Risks	Cost overruns, wasted inputs	Uneven output flow, subjective measures

Contract modifications may require reassessment of the measurement method.

When the scope or price of a contract changes:

• The performance obligation may be modified or replaced

• The original method of progress measurement may become invalid

• The entity must reassess and possibly switch from input to output, or vice versa

IFRS 15 and ASC 606 require this reassessment if the new method better reflects progress, but only with clear justification and documentation.

Disclosures must explain methods used and significant judgments.

Companies must disclose:

• Which method was used (input or output)

• Why the method was chosen

• How it reflects the transfer of control

• Significant assumptions (e.g., cost estimates, milestone criteria)

This allows financial statement users to understand the timing and nature of revenue, particularly for long-term projects.

Hybrid models and exceptions are permitted in limited cases.

Some contracts may combine input and output elements:

• A company might track milestones (output) while using cost-to-cost (input) for variable phases

• A contract with variable deliverables might default to input methods to avoid distorted timing

If no method can reliably measure progress, revenue is limited to costs incurred until progress becomes measurable:

Revenue recognized = costs incurred (zero profit recognized)

Applying input and output methods correctly ensures that revenue recognition aligns with the economic reality of contract fulfillment. By measuring progress faithfully, entities present a transparent and consistent picture of how value is delivered over time, as required under both IFRS 15 and ASC 606.

____________

FOLLOW US FOR MORE.

DATA STUDIOS

datastudios.org