Haliburton Company: Accounting for Cost Overruns and Recoveries Case Study Solutions
Introduction:
Haliburton Company is a multinational corporation that provides services and products to the energy industry. The company is involved in various activities, including drilling, cementing, and well completion. The case study by Maureen McNichols and Brian Tayan discusses the accounting treatment of cost overruns and recoveries in Haliburton Company.
Case Issue:
The issue in this case study is how to account for cost overruns and recoveries in Haliburton Company. Specifically, the case focuses on two situations: (1) a situation where Haliburton Company incurred cost overruns on a fixed-price contract and (2) a situation where Haliburton Company received recoveries on a contract for services that were previously provided.
Case Analysis:
In the first situation, Haliburton Company incurred cost overruns on a fixed-price contract. The fixed-price contract was signed with a customer for the construction of an offshore platform. The contract required Haliburton Company to complete the project within a fixed budget. However, due to unforeseen circumstances, the company incurred cost overruns that exceeded the budget. The case discusses how to account for these cost overruns under the revenue recognition principle.
Under the revenue recognition principle, revenue should be recognized when it is earned, and expenses should be recognized when they are incurred. In the case of cost overruns, Haliburton Company must recognize the additional expenses in the period in which they are incurred. However, the company cannot recognize additional revenue until it is earned. Therefore, the company must defer recognizing additional revenue until it completes the project and earns the revenue.
In the second situation, Haliburton Company received recoveries on a contract for services that were previously provided. The case discusses how to account for these recoveries under the revenue recognition principle.
Under the revenue recognition principle, revenue should be recognized when it is earned. In the case of recoveries, Haliburton Company must recognize the revenue in the period in which it is earned. However, the company cannot recognize the revenue until it has satisfied the performance obligations under the contract. Therefore, the company must recognize the revenue in the period in which it satisfies the performance obligations.
Conclusion:
In conclusion, the case study highlights the importance of properly accounting for cost overruns and recoveries in Haliburton Company. The case shows that under the revenue recognition principle, Haliburton Company must recognize additional expenses in the period in which they are incurred and defer recognizing additional revenue until it completes the project and earns the revenue. Similarly, the company must recognize the revenue in the period in which it satisfies the performance obligations under the contract.
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Recommendations:
Based on the analysis, we recommend that Haliburton Company should ensure that it properly accounts for cost overruns and recoveries in accordance with the revenue recognition principle. The company should also maintain proper documentation of its cost overruns and recoveries to support its accounting treatment.
Additionally, the company should stay up to date with changes in accounting standards related to revenue recognition to ensure that it is in compliance with accounting regulations.
Finally, the company should communicate its accounting treatment of cost overruns and recoveries to its stakeholders, including investors and analysts, to promote transparency and build trust.
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