Explain the complete contract method

Banking & FinanceFinance ManagementGrowth & Empowerment

In complete contract method, recognize all the revenue and profit associated with a project only after completion of project. This method results in deferred tax liability.

Also, this method is used, where there is uncertainty in collecting funds from customers under contract terms.

Businesses can defer recognition of income taxes, if there is any delay in income recognition. Deferment of tax and payments and their benefits can have a positive or negative effect on working capital.

Revenue recognition timing is delayed and irregular. In this method, bills issued and costs incurred are recorded in the balance sheet and the respective amounts are transferred to the income statement after completion of underlying contract. If there is any loss on contract, then, it is recorded at once (no to wait until end of contract period to do so).

Advantages

The advantages of a complete contract method are as follows −

  • The report is based on actual results.
  • It includes deferment of taxes.
  • Cost fluctuations (long term projects) are reduced.
  • Cost and time saving methods are applied.
  • No change in contract compensation with time.
  • Reports high net income, when compared to percentage completion methods.

Disadvantages

The disadvantages of a complete contract method are as follows −

  • The contractor income in the period which is earned, is not necessarily recognized.
  • An extra compensation to the contractor is not entitled, if the project is not completed in estimated time.
  • It is useful for small projects only.
  • The operators’ information is not shown clearly on records.
  • Deduction of loss takes place only after completion of the project.

Uses

This method is used in the following circumstances −

  • Deriving dependable estimates about percentage of completion is not possible
  • Inherent hazards may interfere with project completion.
  • If results under complete contract and percentage contracts methods do not vary materially.
raja
Updated on 06-Jul-2021 12:14:00

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