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Accounting for cost overruns and recoveries

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Managers must make decisions with respect to the financial reporting necessary to apply accounting standards. Consider the article "Halliburton: Accounting for Cost Overruns and Recoveries" (Tayan & McNichols, 2007). Next, using outside sources that you may seek and your professional experience, develop and write a 3 page paper concisely answering the following questions:
(A5.1) What is Halliburton management trying to achieve through decisions with respect to financial reporting for long-term projects?
(A5.2) What accounting standards must Halliburton consider when making its decisions?
(A5.3) Did Halliburton management meet its financial reporting objectives?
(A5.4) What knowledge, estimates, or assumptions did Halliburton accountants (and management) use in making decisions? Were their decisions appropriate?

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1. Halliburton management is trying to inflate its revenues and sales through decisions with respect to financial reporting for long term projects. The company policy before 1993 was to expense cost overruns as soon as they occurred but not to book claims recoveries as revenues until the repayment amount was agreed to with the client. Once the client agreed to the repayment amount, it was recognized as revenue. In 1998, there was a change in Halliburton's policies and it began to estimate future recoveries and recognized them in the same periods that the overrun expenses were realized. The effect of this policy was that Halliburton could estimate future recoveries and increase revenues/profits during the current year. It is possible that the customer may not agree to pay the money estimated by Halliburton. The claim of Judicial Watch was that over a period of four years Halliburton actually inflated the revenues by $534 million.
Halliburton had faced two adversities. First, its revenues were suffering because there was a slowdown in business. Second, the company had suffered large litigation losses from asbestos lawsuits. The lower revenues and losses from litigation would have to be reported in its financial reports and this could lead to fall in the share value of Halliburton. Further, top management ...

Solution Summary

The Halliburton Company case is explained in a structured manner in this response. The answer includes references used.