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LabCo Ltd.
To: Mr. Ocbal- CFO LabCo Ltd.
From: Linh Le, CPA
Date: 11/25/2014
Re: Recommendation for revenue treatment for a construction contract with Halibut Inc.,

During our last meeting, you requested that I review LabCo’s accounting policy over the revenue treatment for your contract with Halibut Inc. After reviewing the various requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 250-10 and 605-35, I conclude that: Using the percentage of completion method was appropriate.

Changing from the percentage of completion method to the completed contract method is reasonable. Your changes in the accounting method is the change in the accounting estimate. In this memo, I will provide further explanation for your three questions regarding LabCo’s revenue treatment in compliance with ASC. Question 1: Is LabCo’s accounting policy for the revenue treatment of its construction contracts correct? a. The codification contains guidance for LabCo’s revenue treatment: LabCo’s accounting policy for the revenue treatment of its contracts was appropriate. First of all, LabCo’s business primarily involves the design and manufacture of large, industrial-sized machinery and tooling. LabCo provides customers with manufacturing parts and components for fighter jets, transport planes, and other aerospace-related machinery and equipment, which fall under the contracts covered in ASC 605-35-15-2 and 3. ASC 605-35-15-2 covers contracts that are “binding agreements between buyers and sellers in which the seller agrees, for compensation, to perform a service to the buyer's specifications.” ASC 605-35-15-2: The performance of contracts for which specifications are provided by the customer for the construction of facilities or the production of goods or the provision of related services. However, it applies to separate contracts to provide services essential to the construction or production of tangible property, such as design, engineering, procurement, and construction management (see paragraph 605-35-15-3 for examples). Contracts covered by this Subtopic are binding agreements between buyers and sellers in which the seller agrees, for compensation, to perform a service to the buyer's specifications. Specifications imposed on the buyer by a third party (for example, a government or regulatory agency or a financial institution) or by conditions in the marketplace are deemed to be buyer's specifications. ASC 605-35-15-3 d further specifies that the subtopic includes “Contracts to design, develop, manufacture, or modify complex aerospace or electronic equipment to a buyer's specification ...

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