Completed contract method?

CFA Level I FRA
#1

This is a question from the curriculum:

[question removed by moderator]

Isn’t the above statement wrong? The correct statement should be: under completed contract method, no net income (profit) would be reported until the project is complete.

#2

The question is inaccurate as the answer depends on whether the company uses IFRS or US GAAP (regarding Revenue that is. The answer is the same regarding Net Income). In general, if the outcome of the contract cannot be measured reliably, then:

  1. Under US GAAP you do not recognize any cost, no revenue, subsequently no net income. Any costs will be recorded on the balance sheet under inventory (" construction in progress").

  2. Under IFRS you do recognize revenue to the degree that it covers your costs but not more ( but only if it is probable the costs will be recovered!!! ), subsequently also no net income.

Check out Example 3 in Reading 25, it illustrates the different treatments under US GAAP and IFRS.

But to answer your question, you are right that there should be no net income reported until the project is complete. And regarding revenue the answer depends on whether they use IFRS or US GAAP.

#3

Under US GAAP completed contract method; no reveue, expense, and profit are recognized untill the contract is complete.