Aren’t We Done Yet Essay

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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…show more content…
If so, how should this change be treated on the basis of the guidance provided within ASC 250, Accounting Changes and Error Corrections? I think 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. Because, as it mentioned in the case, LabCo has experienced some significant problems in the design and manufacture of the product, such as “initial designs had to be redone”, “certain engineering costs had to be outsourced” and the cost of raw materials had risen unexpected. Moreover, the product did not pass the final test environment production simulation at Halibut’s facilities after a six-month delay in the design and construction. Based on these reasons, the percentage-of-completion method will be no longer appropriate to apply on this situation, because the basis of applying the percentage-of-completion method is that the costs of project can be reasonably possible to estimate during the stages of project completion. Moreover, based on the guidance provided within ASC 250, “initial adopting of an accounting principle in recognition of events or transactions should not be considered an accounting change unless it is material. To the case, I think that this issue is material and had a significant effect to the recognition of LabCo’s
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