XM, Ltd., was a small engineering firm that built hi-tech robotic devices for electronics manufacturers.
XM, Ltd., was a small engineering firm that built hi-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2014. Barb McLauren, head engineer and major shareholder, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, she was getting ready to sell her shares and retire in January. She told the controller that the device was 80% complete at year-end, and on track for successful completion the following spring; the controller accrued 80% of the contract revenue in December 2014. McLauren sold out in January 2015 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully, and share prices dropped by 50%.
1. For complex, hi-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue? (Challenge)
2. What action do you think was taken by XM in 2015 with regard to the revenue that had been accrued the previous year?