What Is the Completed Contract Method (CCM)
The completed contract method is an accounting method that enables a taxpayer or business to postpone the reporting of income and expenses until a contract is completed. The recognition of these revenues and expenses is delayed until contract completion even though cash payments may be received or paid during the contract period. This accounting method is frequently used in the construction industry or other industries whose businesses involve long-term contracts.
This contrasts with the cash and accrual methods of accounting. The cash method of accounting recognizes revenues and expenses when cash is either received from clients or paid to vendors. When cash changes hands, the revenue or expense becomes real. The accrual method of accounting recognizes revenue and expenses at the time the activities which earn the revenue or create the expense are performed, even if actual money does not change hands at that time.
Understanding the Completed Contract Method (CCM)
The completed contract method is a unique accounting method that allows all revenue and expense recognition to be deferred until the completion of a contract. This type of accounting method has benefits and disadvantages for a firm's balance sheet. On the one hand, because revenue recognition is postponed, tax liabilities are also postponed. Expense recognition, which can reduce taxes, is also delayed. However, since multiple contracts may finish at once and create a large surge of revenue and expense, this type of accounting method causes fluctuations in the balance sheet. These fluctuations can be seen as a sign of risk and business inconsistency by analysts if they are not aware of the accounting method being used.