We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
DETERMINING THE STAGE AT WHICH IT IS APPROPRIATE TO RECOGNISE PROFIT UNDER LONG-TERM CONTRACTS.
- Authors
Barlev, Benzion
- Abstract
This article proposes a workable definition for long-term contracts and a method for determining the earliest point from which profits should be recognized. The accounting principle, formulated by Statement of Standard Accounting Practice 9, that there can be no attributable profit until the outcome of a contract can reasonably be foreseen means that profit recognition depends on the ability to foresee with reasonable certainty the outcome of a contract. Thus, a definition of the concept reasonable certainty is a critical step in accounting for long-term contracts. As long as such a definition is missing it may be advisable for the contractor and his prudent accountant to assume one and disclose in the financial statements the value assumed as well as the probability level used in the process of recognizing profits. The model offers a method for determining the earliest point during construction from which revenue may be realized and profit recorded. This method relies on statistical theory and is compatible with accepted accounting principles in general and with the prudence concept in particular. It is suggested that the earliest point for recognizing revenues will correspond to the point where the probability that unexpected costs may nullify expected profits is quite low. The model presented offers a practical way for determining the earliest stage at which it is appropriate to recognize profit under long-term contracts. The model is a probabilistic one and its outcomes are compatible with generally accepted accounting principles. Unexpected costs may nullify expected profits up to a late stage of completion. The probability of such occurrence is directly related to the size of the initial deviation of actual from budgeted costs and inversely to the profit margin, and decreases as work on the contract progresses.
- Publication
Journal of Business Finance & Accounting, 1995, Vol 22, Issue 5, p713
- ISSN
0306-686X
- Publication type
Academic Journal
- DOI
10.1111/j.1468-5957.1995.tb00385.x