Deloitte LabCo
Date: 19 September 2013
To: CFO
Subject: Halibut Contract
Mr. CFO:
Accounting Method for Halibut Contract
It has recently come to the attention of our audit team that a change in accounting methods has been proposed to LabCo’s contract with Halibut. The current accounting method is percentage-of-completion, while the plan proposed is a switch to the completed contract method. During our investigation into this matter, we analyzed the codification and validation for the percentage-of-completion method, and determined that the proposed change would be an inappropriate course of action.
Justification of Existing Methods
The Financial Accounting Standards Board’s codification helps reinforce our decision to not switch accounting methods. The current policy for revenue recognition, percentage-of-completion, is in accordance with our business practices. In order for a company to use the percentage-of-completion, four primary conditions must be met:
Total costs are reasonable dependable estimates
The enforceable rights regarding goods and services to be provided are clearly specified
The buyer is expected to satisfy all obligations
The contractor is expected to perform to the buyer’s expectations (ASC-605-35-25-57).
LabCo’s primary business concerns involve designing and manufacturing of industrial-sized machinery that is used by its customers in a variety of manufacturing ways, which satisfy the contact clause of the codification (ASC 605-35-15-2,3). The codification goes on to state that the percentage-of-completion method depends on the ability to make reasonable dependable estimates, which in turn relates to estimates of the extent of progress toward completion, revenues, and costs. In compliance with this, LabCo believe they could reasonably determine the estimates of the contract with Halibut. In previous contracts and agreements with Halibut, their method of revenue recognition was never questioned and a change to a different method was never
To: CFO
Subject: Halibut Contract
Mr. CFO:
Accounting Method for Halibut Contract
It has recently come to the attention of our audit team that a change in accounting methods has been proposed to LabCo’s contract with Halibut. The current accounting method is percentage-of-completion, while the plan proposed is a switch to the completed contract method. During our investigation into this matter, we analyzed the codification and validation for the percentage-of-completion method, and determined that the proposed change would be an inappropriate course of action.
Justification of Existing Methods
The Financial Accounting Standards Board’s codification helps reinforce our decision to not switch accounting methods. The current policy for revenue recognition, percentage-of-completion, is in accordance with our business practices. In order for a company to use the percentage-of-completion, four primary conditions must be met:
Total costs are reasonable dependable estimates
The enforceable rights regarding goods and services to be provided are clearly specified
The buyer is expected to satisfy all obligations
The contractor is expected to perform to the buyer’s expectations (ASC-605-35-25-57).
LabCo’s primary business concerns involve designing and manufacturing of industrial-sized machinery that is used by its customers in a variety of manufacturing ways, which satisfy the contact clause of the codification (ASC 605-35-15-2,3). The codification goes on to state that the percentage-of-completion method depends on the ability to make reasonable dependable estimates, which in turn relates to estimates of the extent of progress toward completion, revenues, and costs. In compliance with this, LabCo believe they could reasonably determine the estimates of the contract with Halibut. In previous contracts and agreements with Halibut, their method of revenue recognition was never questioned and a change to a different method was never