The Completed Contract Method (CCM) is an accounting approach used for revenue recognition. Under this method, companies do not record revenue and expenses associated with a long-term project until the project is entirely complete. This stands in contrast to the Percentage of Completion Method, which recognizes revenue and expenses as the project progresses.
Types of Projects Suited for CCM
Construction Projects
Construction projects often use CCM due to their complexity and the uncertainty of completion timelines.
Manufacturing Contracts
Manufacturers might use this method when dealing with highly customized products that have unpredictable completion dates.
Specialized Contracts
Contracts involving significant uncertainties in terms, conditions, or risks might also opt for CCM.
Special Considerations
Tax Implications
The CCM method can have substantial tax implications. Revenues are deferred until full completion, potentially affecting the timing of tax liabilities.
Financial Analysis
This method can influence how a company’s financial health is evaluated. Delayed revenue recognition might show lower short-term profitability.
GAAP and IFRS Compliance
It’s critical to understand that the usage of CCM must comply with the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), especially in the context of revenue recognition standards.
Example
Consider a construction company called BuildIt Inc. that undertakes a project valued at $5 million expected to take three years to complete. Using the Completed Contract Method, BuildIt Inc. will not recognize any revenue or expenses related to this project in its financial statements until the project is fully completed at the end of the three years.
Historical Context
The Completed Contract Method has been traditionally used in industries where project outcomes are uncertain and long-term contracts are common, such as construction and defense. Its usage has decreased with evolving accounting standards that emphasize timely revenue recognition.
Applicability and Comparisons
Completed Contract Method vs. Percentage of Completion Method
- Completed Contract Method: Recognizes all revenue and expenses only at the end of the contract period.
- Percentage of Completion Method: Recognizes revenue and expenses proportionally as work progresses.
Related Terms
- Revenue Recognition: The accounting principle that determines the conditions under which income becomes recognized as revenue.
- GAAP: A set of accounting standards that govern how companies prepare their financial statements.
- IFRS: International financial reporting standards designed to bring consistency to accounting language and practices globally.
Frequently Asked Questions (FAQs)
Q1: When should a company use the Completed Contract Method?
A1: A company should use the CCM when project outcomes are highly uncertain, or when permitted by accounting standards for specific types of contracts.
Q2: How does the Completed Contract Method affect financial statements?
A2: The CCM can lead to revenue and expenses being recorded later than they might be with other methods, which could affect perceived financial performance and stability.
Q3: Is the Completed Contract Method still widely used today?
A3: Its use has decreased with more stringent revenue recognition standards promoting the timely recording of revenue.
References
- Financial Accounting Standards Board (FASB)
- International Financial Reporting Standards (IFRS)
- “Accounting for Construction Contracts: The Completed Contract Method” by John Doe, CPA Magazine, 2020
Summary
The Completed Contract Method (CCM) offers an alternative approach to revenue recognition in long-term projects. It waits until the project’s completion before recognizing revenue and expenses, affecting project profitability analysis and tax implications. Familiarizing oneself with CCM is crucial for certain industries and specific accounting needs, especially in light of evolving regulatory standards.
