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19 April, 15:21

Which of the following changes should be accounted for using the retrospective approach? Multiple Choice A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

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  1. 19 April, 15:39
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    true ⇒ A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

    Explanation:

    The retrospective approach is used when the accounting standards are changed, and the accounts are adjusted so that they meet the new standards as if they had been used in the past. It basically tries to erase any trace from the previously used standard.

    In this case we must first understand that construction companies use two accounting methods for long-term construction projects:

    Completed contract method (CCM) : the construction company will only recognize profit when the contraction process is complete. This method of accounting can only be used by home builders or for projects that do not exceed 2 years. Percentage of completion method (PCM) : revenue is recognized by estimating the relative completion of a construction contract. There are no limitations on when this method can be used.

    A construction company will probably change its accounting method because the project's completion time increased to over 2 years, and the IRS requires them to do so. In that case, the accounts have to be adjusted to meet the PCM method instead of the CCM. This means that the company must recognize revenue for at least the previous year, instead of trying to recognize it at the end of the project.
  2. 19 April, 17:10
    0
    Answer: A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed

    Explanation:

    The question is incomplete, we are only given one choice to choose from, we will explain retrospective approach and how it is applied. We will also apply the retrospective approach to the question

    Retrospective approach is a method that is used in accounting when to account for changes for example when the new standard adopted changes recognition Criteria for expenses or income.

    When using a retrospective approach to account for changes, we calculate the cumulative effect of the new recognition criteria or new standard from the first period and restate the cumulative effect for the entire historical period in the current period.

    The revenue recognition criteria changed from recognizing revenue when contract is completed to recognizing revenue over time. Cumulative effect of recognising revenue over time will be calculated and restated in the current period.
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