In Accounting for contracts, the basic accounting policy decision is the choice between the two generally accepted methods: the percentage of completion method including units of delivery and the completed contract method.
The determination of which of the two methods is preferable should be based on a careful evaluation of circumstances because the two methods should not be acceptable alternatives for the same circumstances.
The division’s recommendations on basic accounting policy are set forth in the sections on “The Percentage of Completion Method” and “The Completed Contract Method,” which identify the circumstances appropriate to the methods, the bases of applying the methods, and the reasons for the recommendations. The recommendations apply to accounting for individual contracts and to accounting for other profit centers in accordance with the recommendation in the section on “Determining the Profit Center.”
As a result of evaluating individual contracts and profit centers, a contractor should be able to establish a basic policy that should be followed in accounting for most of his contracts. In accordance with the requirements of APB Opinion No. 22, Disclosure of Accounting Policies, a contract should disclose in the note to the financial statements on the account policies the method or methods of determining earned revenue and the cost of earned revenue including the policies relating to combining and segmenting, if applicable. Refer to the appendix C SOP 81-1 which contains a summary of the disclosure requirements in this statement.
For Further Reading of this article and the Appendix C: FASB
SUMMARY OF DISCLOSURE RECOMMENDATIONS IN STATEMENT OF POSITION
(we’ll review these on the next Post!)
SOP Par. Nature of Disclosure
.21 Accounting policy-methods of reporting revenue
.45 Method or methods of measuring extent of progress towards
.52 Criteria for determining substantial completion
.65-.67 Information on revenue and costs arising from claims
.84 Effects of changes in estimates on contracts
.90-.91 Effects of accounting changes to conform to SOP
What are your thoughts and findings on the two different GAAP Standard Construction Revenue Recognition methods…are these the methods you currently use?
Look forward to hearing from you,
Terry E. Kelley MBA