profit is recognized only when a long-term construction contract is completed. It should be used only when the conditions of the percentage-of-completion method cannot be applied. However, if a loss on the contract is expected, it should be immediately recognized consistent with the conservatism principle.
accounting method whereby revenues and expenses (and therefore taxes) on long-term contracts, such as government defense contracts, are recognized in the year the contract is concluded, except that losses are recognized in the year they are forecast. This method differs from the percentage-of-completion method, where sales and costs are recognized each year based on the value of the work performed. Under the tax reform act of 1986, manufacturers with long-term contracts must elect either the latter method or the percentage-of-completion capitalized cost method, requiring that 40% of the contract be included under the percentage-of-completion method and 60% under the taxpayer’s normal accounting method.