Convert % of completion accrual basis to cash basis

[David]

I have a client whose financial review accrual basis statements are booked using the % completion method. The client's S Corp tax return reports cash basis.

 

For those who have construction clients or clients who use % of completion -

 

When I convert from accrual to cash should I only consider AR and AP and not adjust for the Billings in Excess of Costs or the Costs in Excess of Billings accounts?

 

My thinking is that similar to a cash basis taxpayer who reports inventory, the cash basis tax return would still want to reflect matching of revenues and costs.

 

Am I doing the accrual to cash conversion correctly for this?

 

Thanks.

 

 

[OldJack]

You should NOT convert the accrual booked financial statements to cash basis.  GAAP requires the corporation to report on the accrual basis for its financial statements if presenting statements to third parties.  If your client understands how it could effect his credit he would probably not want you to do that.

[David]

I apologize for not being clear with my question.

 

I prepared the financial review financial statements on the GAAP basis, which is % of completion and accrual basis.

 

The client reports the TAX RETURN on a cash basis. That is why I asked the question about converting the GAAP accrual statements to cash basis for the tax return.

 

Thanks for your help.

[OldJack]

I would expect that your client is wanting a cash basis and "completed contract" basis for his tax return.  Unless he has been reporting on completed contract basis before, that would likely be a change in accounting methods for tax purposes requiring IRS approval.