Which guidance item is included in Notice 89-15?

Which guidance item is included in Notice 89-15?

• A. Determination of accounting method
• B. Aggregating and severing contracts
• C. Small home and residential construction contracts
• D. Changes in method of accounting

Answer: (B)

The key idea tested is how long-term construction contracts are treated for accounting purposes when there are multiple contracts involved. Notice 89-15 lays out guidance on whether contracts should be aggregated into a single long-term contract or severed and treated as separate contracts. This matters because the method of revenue and cost recognition (such as percentage-of-completion versus other methods) can change depending on whether you view related work as one project or as independent contracts. Why the chosen item fits best: Notice 89-15 explicitly addresses aggregation and severance of contracts. It provides criteria for when multiple contracts should be combined to form one contract for accounting purposes (e.g., when they are interdependent or performed as part of a single project with shared resources) and when they should be treated separately (e.g., when they are distinct, with independent performance and profits). This guidance directly matches the concept being tested. Context to aid understanding: In practice, a builder or contractor might have several related jobs with common management, financing, or interdependent work. Seeing them as one contract can affect when and how much revenue and costs are recognized in each period. If they’re truly independent, they’re separated so each contract’s income is reported separately. Notice 89-15 formalizes these distinctions so accounting results reflect the economic reality of how the contracts are managed and completed. The other topics mentioned are not the focus of this notice—the guidance isn’t about determining or changing accounting methods in general, nor about small home and residential contracts specifically.

The key idea tested is how long-term construction contracts are treated for accounting purposes when there are multiple contracts involved. Notice 89-15 lays out guidance on whether contracts should be aggregated into a single long-term contract or severed and treated as separate contracts. This matters because the method of revenue and cost recognition (such as percentage-of-completion versus other methods) can change depending on whether you view related work as one project or as independent contracts.

Why the chosen item fits best: Notice 89-15 explicitly addresses aggregation and severance of contracts. It provides criteria for when multiple contracts should be combined to form one contract for accounting purposes (e.g., when they are interdependent or performed as part of a single project with shared resources) and when they should be treated separately (e.g., when they are distinct, with independent performance and profits). This guidance directly matches the concept being tested.

Context to aid understanding: In practice, a builder or contractor might have several related jobs with common management, financing, or interdependent work. Seeing them as one contract can affect when and how much revenue and costs are recognized in each period. If they’re truly independent, they’re separated so each contract’s income is reported separately. Notice 89-15 formalizes these distinctions so accounting results reflect the economic reality of how the contracts are managed and completed.

The other topics mentioned are not the focus of this notice—the guidance isn’t about determining or changing accounting methods in general, nor about small home and residential contracts specifically.