What is the completed contract method?
The completed contract method is an accounting method that includes recording income and expenditure from the ongoing project only if it is completed. The most important use of this method is for long -term contracts, such as contracts issued by the government. The use of the completed contract method affects the time when tax payments are made. The exception is the completed contract. The main advantage is that it overcomes the problems of long -term projects that cause misleading impression in the accounts. For example, an organization that builds a football stadium would spend a lot of money ahead, but could not receive a payment until it was completed. As the company knows that it will eventually get money and will be scheduled for this situation can be considered a margin.
Even in long -term projects, the use of the completed contract method is relatively rare. The more common option is known as the method of completion. This means that the accounts show each yearpart of the total income and expenditure expected. This is usually possible only for a long -term project with an agreed fee and controlled costs, such as the construction of equipment for the client. It works simply: if the project is planned for four years, at the end of each year the company will include 25% of expected expenses in the cost section and 25% of the agreed fee in the Income section.
The use of the completed contract has consequences for tax payments. In a sense, this is an advantage for society, because its profits do not appear until the project is completed, which means it can postpone paying the relevant taxes. In annotate, it may be a disadvantage, because the company is unable to calculate its expenditure, while the project is still ongoing, which means that these expenses cannot use the total tax liability.
Some countries have tax requirements that affect which method can be used. In the United States, the Tax Reform of 1986 and the subsequent legislation effectivelyIt prohibits in most cases simply using the completed contract. The company involved in the long -term project must either use the method of completion, or decide to include 40% of the total value using the completion method and the remaining 60% according to its normal accounting method, which may include the completed contract method.