Halliburton Company

Halliburton Company: Accounting for Cost Overruns and Recoveries

1. What types of financial transactions are at issue in this case?

According to Halliburton case, the financial transaction that is at issue is the accounting treatment for claim. Normally, the company will do the job as agreed in the contract and receive earnings at the price specified in the contract. Sometimes, there might be some change order which increase the scope of the project and cause the costs exceeding the estimation in the contract. The change order that has not approved yet in both scope and price is treated as claims. According to SOP 81-1, the recognition of the additional revenue arising from the change order is only appropriate when the claim will result in additional contract revenue and if the amount of that revenue can be measured reliably. Otherwise, the claim should be deferred until the collection amount is agreed with the customer and the collection is deemed as probable. As the company changed the accounting treatment for claim in 1998, it became an issue because the company didn’t disclose this change and the effect from the change.

2. How did the company account for cost recoveries prior to 1998? After 1998?

Before 1998, Halliburton’s accounting policy was to record cost overrun expenses as soon as they occurred but not to book the revenues associated with claims until the company agreed the amount to be received with the clients. The company would recognize the revenues only when the amount to be collect was certain and deemed as collectible.

After 1998, the company had changed the accounting treatment when there’s cost overrun. The company started to estimate the amount of claim in that period when cost overruns occurred. It would be included in revenues even though the company had not negotiated about the price with the customers yet. The revenues would be recognized when the collection of the claims is probable. When the amount of the claim was finally...