Which two conditions must be met for indirect costs to be deferred as contract costs under completed contract or percentage-of-completion methods?

Which two conditions must be met for indirect costs to be deferred as contract costs under completed contract or percentage-of-completion methods?

• A. The two conditions must be present simultaneously
• B. Costs related directly to the contractor's contracting activities
• C. Costs directly related to performance of specific contract-in-progress
• D. Both A and B are true

Answer: (D)

Indirect costs can be deferred as contract costs only when they meet two specific criteria at the same time: they must be related directly to the contractor’s contracting activities, and they must be related directly to the performance of a specific contract in progress. In other words, the cost has to be tied to the work being done on a particular contract, not just to contracting in general. When both conditions hold, those indirect costs can be accumulated as part of the contract costs and recognized in the contract’s progress or at completion, aligning expense recognition with the associated revenue. If a cost isn’t linked to a specific contract-in-progress or isn’t clearly tied to the contracting activities for a given contract, it should not be deferred as a contract cost.

Indirect costs can be deferred as contract costs only when they meet two specific criteria at the same time: they must be related directly to the contractor’s contracting activities, and they must be related directly to the performance of a specific contract in progress. In other words, the cost has to be tied to the work being done on a particular contract, not just to contracting in general. When both conditions hold, those indirect costs can be accumulated as part of the contract costs and recognized in the contract’s progress or at completion, aligning expense recognition with the associated revenue. If a cost isn’t linked to a specific contract-in-progress or isn’t clearly tied to the contracting activities for a given contract, it should not be deferred as a contract cost.