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If you`re a business owner or accountant, understanding the completed contract method (CCM) can be crucial to properly reporting your financial statements. The CCM is an accounting method used to recognize revenue and expenses on long-term contracts.
To use the CCM, there are specific requirements that must be met. Here are some of the key requirements to keep in mind:
1. Long-Term Contracts
To use the CCM, a contract must be considered long-term. This means that the contract must span multiple accounting periods. There is no specific timeline for how long a contract needs to be to be considered long-term, but it should be significant enough to impact financial statements.
2. Unpredictable Costs
The CCM is most useful when a contract contains unpredictable costs. If a contract has predictable costs, the percentage of completion method might be a better option. The CCM recognizes all costs and revenue upon completion of the contract, regardless of any fluctuations in cost.
3. Reliable Estimates
It`s important to be able to make reliable estimates about the cost of a long-term contract. Accurate estimates will allow you to properly report revenue and expenses on financial statements. This also ensures that you`re not over or under-reporting profits.
4. Control of the Asset
The CCM can only be used when the business has control of the asset being created or worked on. This means that the business owns or has the right to the asset, and has the ability to transfer ownership to the customer upon completion.
5. No Significant Obligations
There can be no significant obligations that must be fulfilled after completion of the contract. This ensures that the CCM accurately reflects all revenue and expenses associated with the contract.
6. Clear Collection
The final requirement for using the CCM is that collection of the contract`s proceeds must be reasonably assured. This means that there is a high likelihood that the customer will pay the full amount owed upon completion of the contract.
In conclusion, the completed contract method is an accounting method that can be helpful for businesses with long-term contracts that contain unpredictable costs. To use this method, it`s important to meet all of the requirements listed above. By properly understanding and utilizing the CCM, businesses can ensure that their financial statements accurately reflect revenue and expenses associated with long-term contracts.