What Is the Completed Contract Method (CCM)
The completed contract method is an accounting technique that lets taxpayers and businesses postpone the reporting of income and expenses, until after a contract is completed, even if cash payments were issued or received during a contract period. This accounting method is frequently used in the construction industry or other sectors that tend to involve long-term contracts.
This accounting practice contrasts with the cash and accrual methods of accounting. The cash method recognizes revenues and expenses when cash is either received from clients or paid to vendors. Simply stated: when cash changes hands, revenues or expenses become real. The accrual accounting method recognizes revenues and expenses during the time when the activities that earned the revenue or created the expense occurred--even if actual money does not change hands at that time.
Understanding the Completed Contract Method (CCM)
The completed contract method is unique, in that it allows all revenue and expense recognition to be deferred until the completion of a contract. This can present both benefits and disadvantages to a firm's balance sheet. On one hand, because revenue recognition is postponed, tax liabilities are also postponed, in kind. Expense recognition, which can reduce taxes, is likewise delayed. On the downside, if a cluster of contracts finishes all at once, this may create a sudden surge of revenues or expenses, which can cause radical balance sheet fluctuations. From an optics perspective, this can make businesses seem inconsistent to stock analysts, who might consequently flag such companies as investment risks.
Another type would be the percentage of completion method.