Question

During 20X5, the Company recognized revenue of $400,000 related to a single contract. The contract was for a service that was to be provided over a four year period starting on January 1, 20X5 and therefor should have been recognized ratably over four years beginning January 1, 20X5 1. Is this change allowed? If so, is it a –Change in accounting principle –Change in accounting estimate –Correction of an error in previously issued financial statements, or –Change in reporting entity 2. In what Period should this be recognized (retrospective, current and/or prospective) 3. Is financial statement disclosure required?

Answer 1

Firstly, the treatment the company has made is not as per accounting principles.

As per Revenue Recognition and Long-Term Contract, any long term contract revenue can be recognized following either percentage of completion method or completed contract method.

Here, the company has recognized the entire revenue and it doesn't fall in any of the two methods.

That is an error and has to be rectified.

2. This amount is to be recognized retrospectively.

3. Yes, financial statement disclosure is needed.