Aren’t We Done Yet
Group case 12-5
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 …show more content…
The new method should be applied as if it has applied from the beginning of the project.
Q3, Labco is contemplating adopting IFRS in the coming year. How may Labco accounting policy and accounting for the Halibut contract change under IFRS
Answer: Based upon the facts presented within the case overview, LabCo’s accounting policy for the revenue treatment of its construction contracts is reasonable. The company primarily uses the percentage-of-completion method of accounting. LabCo’s contracts involve “the design, development, and manufacture of machines that are unique and customized to the specifications of its customers”. Also LabCo “negotiates all its contracts with its customers on either a fixed-price or cost-plus basis”. These circumstances are ideal for the percentage-of-completion method as described in ASC 605-35-25-57 “The percentage-of-completion method is considered preferable as an accounting policy in circumstances in which reasonably dependable estimates can be made and in which all the following conditions exist: a. Contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement. b. The buyer can be expected to satisfy all obligations