Date: 19 September 2013
Subject: Halibut Contract
Accounting Method for Halibut Contract
It has recently come to the attention of our audit team that a change in accounting methods has been proposed to LabCo’s contract with Halibut. The current accounting method is percentage-of-completion, while the plan proposed is a switch to the completed contract method. During our investigation into this matter, we analyzed the codification and validation for the percentage-of-completion method, and determined that the proposed change would be an inappropriate course of action.
Justification of Existing Methods
The Financial Accounting Standards Board’s codification helps reinforce our decision to not switch accounting…show more content…
This change is handled on a prospective basis. This prospective approach is used when the retrospective approach is impractical, which was proven by not converting to the completed contract accounting method. This prospective basis is how we will account for the new estimate in the case of the Halibut-LabCo contract. The audit team and myself will ensure that these estimates are being carried out to their entirety.
We have come to the decision that changing the accounting method from percentage-of-completion to the completed contract method is unnecessary. During our internal investigation, it became clear that LabCo needed a change in the accounting estimate of the contract rather than the accounting method. This was substantiated by reviewing the four primary conditions that must be present to use the percentage-of-completion method: total costs are reasonable dependable estimates; the enforceable rights regarding goods and services to be provided are clearly specified; the buyer is expected to satisfy all obligations; and the contractor is expected to perform to the buyer’s expectations (ASC-605-35-25-57). For further clarification or questions regarding this matter, please do not hesitate to contact me.