The following disclosure is from Note 1 of the 2007 Financial Statements for SNC- Lavalin (SNCL), an engineering firm headquartered in Montreal.
SNC-Lavalin 2007 Financial Statements Note 1
Revenues from Services, Packages and Operations and Maintenance categories are recognized based on the nature of the contract, which are mainly as follows:
- Services and Packages activities'. Cost-plus reimbursable contract revenues are recognized as costs are incurred, and include applicable fees earned as services are provided. Fixed-price contract revenues are recorded on the percentage-of-completion basis over the duration of the contract. The percentage of completion is determined by dividing the cumulative costs incurred as at the balance sheet date by the sum of incurred costs and anticipated costs for completing a contract.
- Operations and Maintenance activities. Fixed-fee revenues from “cost reimbursable with a fixed- fee” contracts are recognized on a straight-line basis over the term of the contract. Revenues on fixed-price contracts are recognized based on the stage of completion of the contract activity which involves taking the costs incurred as at the balance sheet date and dividing by the estimated total contract costs.
For fixed-price contracts from all revenue categories, the cumulative effect of changes to anticipated costs and anticipated revenues for completing a contract are recognized in the period in which the revisions are identified. In the event that the anticipated costs exceed the anticipated revenue on a contract, such loss is recognized in its entirety' in the period it becomes known. SNC-Lavalin has numerous contracts that are in various stages of completion. Estimates are required to determine the appropriate anticipated costs and revenues.
Required:
Identify the methods used by SNCL to account for its construction contracts.