Large contractors are required to account for long-term contracts using the
percentage-of-completion method, also known as PCM, for their general-construction contracts.
460 is any contract for the manufacture, building, installation, or construction of property if the contract is not completed within the tax year it was entered into, and in most cases requires use of the
percentage-of-completion method to recognize revenue.
At present, revenues from the industry's sales of condominium units are recognized under the
percentage-of-completion method.
GAAP requires the
percentage-of-completion method unless reliable estimates cannot be made.
Contractors who use the
percentage-of-completion method (see main article) need to "look back" when the contract is done.
The company also stated that it will now submit a plan of compliance no later than 14 May 2012 explaining that the complexities and complications of the restatement recognising revenue using the
percentage-of-completion method rather than multiple deliverable elements resulted in its inability to file within the 5-day extension period that ended 14 February 2012.
Excluding the impact of applying the
percentage-of-completion method, sales increased by 4.
SOP 81-1 explains the
percentage-of-completion method and how it applies to contracts as follows: Contracts covered by this statement of position are binding agreements between buyers and sellers in which the seller agrees, for compensation, to perform a service to the buyer's specifications.
Strite, for instance, is a stickler for such numbers, encouraging remodelers in industry seminars and other forums to adopt and practice the
percentage-of-completion method of accounting as a critical first step to solving slippage.
Common fraud techniques include certain "channel stuffing" (for example, shipping inventory in excess of orders, or providing special incentives to customers to purchase more inventory than is now needed, in exchange for future discounts and other benefits), reporting revenue after goods are ordered but before they are shipped, improper year-end cutoff procedures, reporting revenue when significant services are still to be performed or goods delivered, and improper use of the
percentage-of-completion method.
The IRS valued the inventory at the cost of producing it plus a profit estimated by management and applied to a
percentage-of-completion method.
Because there is little if any deferral of income under the
percentage-of-completion method (particularly where progress payments are scheduled to effectively shift the interest cost to the contracting customer), the regulations could provide that for purposes of section 460(c)(3) that, where 100 percent of the contract is accounted for under the
percentage-of-completion method, a contract shall be deemed not to be a long-term contract.
