To: Mr. Ocbal- CFO LabCo Ltd.
From: Linh Le, CPA
Re: Recommendation for revenue treatment for a construction contract with Halibut Inc.,
During our last meeting, you requested that I review LabCo’s accounting policy over the revenue treatment for your contract with Halibut Inc. After reviewing the various requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 250-10 and 605-35, I conclude that:
Using the percentage of completion method was appropriate.
Changing from the percentage of completion method to the completed contract method is reasonable.
Your changes in the accounting method is the change in the accounting estimate.
In this memo, I will …show more content…
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.
Hence, LabCo’s choice to switch to the completed contract method is appropriate. The change does not conflict with your pre-established accounting policy because ASC 605-35-25-90 allows companies to use the completed contract method for a single contract or a group of contracts when the estimate is doubtful. ASC 605-35-25-90: “An entity using the percentage-of-completion method as its basic accounting policy shall use the completed-contract method for a single contract or a group of contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates doubtful.” Question 3: If I recommend that LabCo changes its method of accounting, how should LabCo treat this change based on the guidance provided within ASC 250, Accounting changes and error corrections?
To account for the change in the revenue recognition method, ASC 250-10 provides 3 alternatives for accounting treatment for the changes.
Alternative 1: Change in Accounting Principle.
ASC 250-10-20 Glossary defines the change in accounting principle as:
A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly