Case 12-05 Essay

1819 Words Apr 15th, 2013 8 Pages

LabCo must determine if their accounting policy for the revenue treatment of its construction contracts is reasonable, if it is appropriate for LabCo to change its method of accounting for the Halibut contract from the percentage-of-completion method to the completed-contract method and how the change should be treated on the basis of the guidance provided within ASC 250, and how LabCo’s accounting policy and accounting for the Halibut contract may change under IFRS if adopted in the coming year. This memorandum will provide support for how the overall conclusion, based on the issues above, was reached.

Accounting Policy for Revenue Treatment

LabCo is a large construction contracting firm, and negotiates all of its
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Business entities engaged in contracting, like all business entities, are exposed to numerous business risks that vary from contract to contract. The reliability of the estimating process in contract accounting does not depend on the absence of such risks. Assessing business risks is a function of users of financial statements.
According to ASC 630-35-25-97, Circumstances to be considered in determining when a project is substantially completed include, for example, delivery of the product, acceptance by the customer, departure from the site, and compliance with performance specifications.
Changes to and from Percentage-of-Completion and Completed-Contract Methods
Based on review of ASC 605-35-25-94, the completed-contract method is preferable in circumstances in which estimates cannot meet the criteria for reasonable dependability discussed in paragraph 605-35-25-57 or in which there are inherent hazards of the nature of those discussed in paragraphs 605-35-25-65 through 25-66. An entity using the percentage-of-completion method as its basic accounting policy shall depart from that policy and use the completed-contract method for a single contract or a group of contracts only in the circumstances described in paragraph 605-35-25-61.
In addition, 605-35-25-95 states, an entity using the completed-contract method as its basic accounting policy shall depart from that policy for a single contract or a group of contracts not having the

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