The NIF D-1, focused on the recognition of revenue from contracts with customers, is crucial for companies that manage long-term projects, such as construction. This standard allows revenue to be recognized as the delivery of goods or services progresses, more faithfully reflecting the value generated for customers at each stage of the project.

 In this article, we will explore a practical case of Constructora ABC SA de CV, a company that applies the NIF D-1 to record revenues progressively over a two-year construction project. Through this application, we will see how revenues and costs are allocated based on progress, allowing the financial statements to reflect the operational reality of the project.

Context of practical case

The company ABC Construction Company S.A. de C.V. sign a contract with the client Northern Real Estate Anonymous Society of Variable Capital to build an office building over a two-year period. The contract has a total value of $10,000,000 MXN, and the terms state that revenue will be recognized as the project is completed. The work includes the structure, electrical systems and finishes.

Application of NIF D-1

1. Identification of Obligations to Comply
   ABC Construction Company identifies that the contract includes multiple obligations to be fulfilled, which are integrated into a single construction obligation, since the client receives a global benefit from the entire work.
2. Determining the Transaction Price
   The transaction price is $10,000,000 MXN, which represents the amount that Constructora ABC expects to receive upon completion of the project. No variable consideration is expected, so the price is fixed.
3. Progress Measurement Method
   Since the building will be built over two years and the progress of the project can be measured directly, Constructora ABC decides to use the incurred cost method to measure progress. This method consists of calculating progress based on the costs incurred in relation to the total estimated cost.
4. Cost Estimation and Revenue Recognition
   ABC Construction estimates that the project will have a total cost of MXN $8,000,000. It is planned to incur 40% of the costs during the first year and 60% in the second.

Progress-Based Revenue Recognition Exercise

Year 1

• Costs incurred at the end of the year: $3,200,000 MXN (equivalent to 40% of the total cost of $8,000,000 MXN).
• Percentage of progress: 40%.
• Income to be recognized in the first year: 40% of the total contract price, that is, $10,000,000 MXN * 0.40 = $4,000,000 MXN.

In the first year, Constructora ABC will record revenues of $4,000,000 MXN, reflecting progress in fulfilling the obligation.

Year 2

• Costs incurred at the end of the second year: $4,800,000 MXN (remaining total cost of $8,000,000 MXN).
• Percentage of progress: 100% (the project has been completed).
• Income to be recognized in the second year: 60% of the total contract price, that is, $10,000,000 MXN * 0.60 = $6,000,000 MXN.

In the second year, Constructora ABC will record additional revenues of $6,000,000 MXN, completing full revenue recognition of $10,000,000 MXN.

Revenue Recognition Summary

• Year 1: $4,000,000 MXN recognized based on the progress of 40%.
• Year 2: $6,000,000 MXN recognized based on the progress of 60%.

ABC Construction Company manages to reflect the real progress of the project in its financial statements, recognizing income according to the progress made in fulfilling its obligations. This case demonstrates how the company NIF D-1 allows revenue to be recognized fairly and proportionally to the value transferred to the customer throughout the project.

We recommend you read about the NIF D-2 Costs for customer contracts

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