Companies entering into long-term construction contracts, especially in the aerospace & defense and engineering & construction industries, frequently apply the percentage-of-completion method of accounting under the contract accounting guidance.1To apply this method of accounting, a company must have the ability to make reasonably dependable estimates of contract revenues and costs, and the extent of progress toward completion.
Estimating is an essential part of contract accounting and revisions to those estimates are necessary as work progresses. ASC 250, Accounting for Changes and Error Corrections, requires certain disclosures in a company's financial statement footnotes when the effect of revising an estimate is material. The frequency of SEC comments on this topic, predominantly to registrants in the aerospace & defense and engineering & construction industries, continues to increase. This Practical tip highlights the U.S. GAAP disclosure requirements and considerations relating to changes in contract estimates when using the percentage-of-completion method of accounting.
1ASC 605-35, Revenue Recognition: Construction-Type and Production-Type Contracts