Wiley GAAP 2008

Concepts, Rules, and Examples

Cost‐plus‐fixed‐fee contracts (CPFFC) are used for the manufacture and delivery of products, the construction of plants and other facilities, and for management and other services. The amount of the flat‐fee payment is usually determined by the ratio of the actual expenditures to the total estimated expenditures. CPFFC may be cancelled and terminated by the government. If this occurs, the contractor is entitled to reimbursement for expenditures and an appropriate portion of the fixed fee.

Normally, profits are recognized when the right to full payment is unconditional. However, revenues can be accrued and profits recognized for partial performance when total profit can be reasonably estimated and realization is reasonably assured. The fees are usually accrued as they become billable. Because risk is minimal and there is no credit problem, billable amounts are indicative of realization. The contractor's fee is considered earned when it is billable and when the related costs are incurred or paid. Accrual based on billable amounts is an application of the percentage‐of‐completion method, rather than a deviation from the accrual method. The fee is considered billable when approved by the government. An alternative date is used when a determination is made that estimated and final costs are significantly different. Accrual of the fee upon delivery or based on percentage of completion is more appropriate when excess costs are substantial.

For supply contracts, ...