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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 307
Experience:  Tax Accountant at Praxair, Inc.
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I have a question on the proper revenue recognition

Customer Question

Hello,
I have a question on the proper revenue recognition on a services type fixed price contract.
Mid size public company. Government contracting and the contract in question provides services to the government with the delivery of hours in support of software engineering support.
Each FFP contract has a period of performance of 12 months that cross fiscal years.
We invoice and collect payment on a fixed amount each month (total FFP / 12 months).
However we are currently recognizing revenue based on and EAC. (ACWP+ETC=EAC)
FFP VALUE – EAC = Profit $
Profit % / EAC = Profit %
Each month as cost is incurred we apply the EAC Profit % and only recognized this revenue. We update the EAC qtrly and adjust +/- if the estimate cost increases or decreases. Then use the new EAC % going forward. At the end of the contract we adjust the revenue (write-up) to recognize any remaining FFP Value. We do this to identify risk and recognize a loss in the month identified.
Because we invoice a fixed amount but recognize revenue based on the EAC we have an unbilled reconciliation issue each month.
There are 2 different method being discussed and I want to ensure both are correct and compliant.
Option 1 - % of completion method. While this won’t resolve the unbilled issue it will reduce the variance and easier to calculate and update monthly. It will also allow the continued practice of identifying risk and loss.
Option 2 – recognize the same fixed amount we are billing and collect cash for. Is this considered cash based accounting? Is it proper given the contract type?
Which method is better or is there another option we are not considering?
Submitted: 1 year ago.
Category: Finance
Expert:  BK-CPA replied 1 year ago.
Hello and thank you for your question.
Some advice to get your question answered:
1) Please don't use abbreviations until after you've specified their meaning: FFP, EAC, ACWP, ETC, etc.
2) Revenue for service contracts is generally recognized when earned under U.S. Generally Accepted Accounting Principles, so quite simply 1/12 of the contract price each month in your case. You have strayed from this principle, so to understand why, if you are able to clarify what Accounting Standards Codification sections you are currently relying on that would be helpful.
I will opt out at this point so that other experts are more inclined to answer, but if you reply and I have the time later to assist you I may.
Expert:  Jonathan Tierney replied 1 year ago.
As a publicly traded company, the SEC requires you to report financial results under U.S. generally accepted accounting principles (US GAAP). Under US GAAP, the percentage of completion method is the only acceptable method for accounting for long-term contracts.
However, if the contract is non-binding and you are allowed to back out, recognizing revenue for each month as it is billed is also acceptable.
Let me know if you need any additional information.