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When Does A Contractor Claim Become A Receivable?

Sunday, February 02, 2003 12:36 pm


In recent months, a series of lawsuits have been filed in Federal District Court in Dallas, Texas, against Halliburton Company, Arthur Andersen, and numerous current and former Halliburton directors and officers including Vice President Richard Cheney. Judicial Watch filed the most publicized action of the series on the grounds that defendants perpetrated a fraud against "shareholders, potential investors, and the securities market"under the laws of Texas. Nineteen of the lawsuits are class actions filed under federal securities law. All of the lawsuits allege that the defendants defrauded Halliburton investors by altering the accounting treatment of unresolved construction contract claims.

The plaintiffs contend that when Halliburton started treating unresolved claims as receivables, Halliburton violated Financial Accounting Standards Board Statement of Position 81-1 and made a change in accounting principle without the disclosure required by Accounting Principles Bulletin 20. The defendants have initially responded to the Judicial Watch action with motions to dismiss on the grounds that plaintiffs have failed to allege fraud with sufficient specificity. When defendants file their answers on the merits of plaintiffs' complaint, they will likely assert that the treatment of unresolved claims as receivables was consistent with Statement of Position 81-1 and was not a change in accounting principle that triggered the disclosure requirement of APB 20.

The Accounting Treatment of Claims

The following hypothetical example illustrates the accounting practice that is being challenged. A contractor finds itself expending millions of dollars above the budgeted amount for excavation on a project due to subsurface site conditions that differed materially from the representations in the contract documents. The contractor maintains careful records of the increased costs incurred and, as authorized by the contract, submits a claim for $10 million.

The contractor's attorneys provide an opinion that the project owner is liable under the terms of the contract for the increased costs. Outside accountants and construction experts confirm that, based upon the contractor's records maintained in the ordinary course of business, the increased costs are $10 million. The contractor knows that the project owner has the financial capacity to pay the claim and has a practice of settling claims fairly, but only after thorough investigation and negotiation. It is unlikely the contractor will recover the claim proceeds in the current, or even the following, fiscal year. It has been the contractor's practice to date to record claim revenue only when it is actually received.

The contractor, possibly motivated by a desire to improve its position with its lenders and investors, decides to recognize a portion of the unresolved claim during [...]

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