Aren’t We Done Yet
Accounting 6100
Group case 12-5
Keith Easterday
Robin Miller
Shengnan Hu
Yu Cao
Aren’t We Done Yet
Q1, On the basis of the facts presented with the case overview, is Labco’s accounting policy for the revenue treatment of its construction contract reasonable? Answer: Under LabCo's current Accounting Policy if reliably dependable estimates of total costs to be incurred under a specific contract cannot be made the completed-contract method shall be followed. IFRS does not recognize the completed-contract method, but instead requires the use of the cost recovery method per IAS No. 11. The cost recovery method expenses contract costs as they are incurred, and an offsetting amount of contract revenue is recognized to the extent that it is probable that costs will be recoverable from the customer. Under the completed-contract method both contract costs and revenue are recognized at the end when the contract is complete. The cost recovery method is similar to the percentage-of-completion method in that its goal is to have each period's accomplishments fairly reported over the life of the contract so that Net Income will provide a measure of periodic accomplishment to help predict future accomplishments. It is important to note that profit is not recognized by either the completed-contract nor cost recovery methods until the contract is essentially completed.
LabCo will have to adopt the cost recovery method of revenue recognition for the Halibut contract as well as other instances where total costs cannot be reliably estimated if they wish to follow IFRS in the future.
Currently FASB and IFRS are working on a new comprehensive approach to revenue recognition. The new standard will likely be controversial as some practices would change considerably such as the percentage-of-completion method not being allowed unless the customer controls the asset during construction. Much is being discussed, but it is clear that both
Group case 12-5
Keith Easterday
Robin Miller
Shengnan Hu
Yu Cao
Aren’t We Done Yet
Q1, On the basis of the facts presented with the case overview, is Labco’s accounting policy for the revenue treatment of its construction contract reasonable? Answer: Under LabCo's current Accounting Policy if reliably dependable estimates of total costs to be incurred under a specific contract cannot be made the completed-contract method shall be followed. IFRS does not recognize the completed-contract method, but instead requires the use of the cost recovery method per IAS No. 11. The cost recovery method expenses contract costs as they are incurred, and an offsetting amount of contract revenue is recognized to the extent that it is probable that costs will be recoverable from the customer. Under the completed-contract method both contract costs and revenue are recognized at the end when the contract is complete. The cost recovery method is similar to the percentage-of-completion method in that its goal is to have each period's accomplishments fairly reported over the life of the contract so that Net Income will provide a measure of periodic accomplishment to help predict future accomplishments. It is important to note that profit is not recognized by either the completed-contract nor cost recovery methods until the contract is essentially completed.
LabCo will have to adopt the cost recovery method of revenue recognition for the Halibut contract as well as other instances where total costs cannot be reliably estimated if they wish to follow IFRS in the future.
Currently FASB and IFRS are working on a new comprehensive approach to revenue recognition. The new standard will likely be controversial as some practices would change considerably such as the percentage-of-completion method not being allowed unless the customer controls the asset during construction. Much is being discussed, but it is clear that both