Muhammad Elfan Budi Nugroho

29118399 – YP60A

Midterm Test

HALLIBURTON’s Case

Problem :
Lawsuit from Judicial Watch that Halliburton Company had overstated revenues during period
1998 to 2001. Halliburton Company’s accounting policies and practices inflated revenues during the
period as much as $534 million. In order to boost their revenues and hide deteriorating financial
position from investor.

Causes :
In 1998, Halliburton Company changed revenue recognition policies that they claimed
unpriced (overrun cost) in long-term projects. Before the change, Company did not book revenues
with a claim until agreement had been reached with client and amount that could be collected. After
the change, Company were estimating the amount of claim in the period could be collected before
agreement with client, then difference of estimate and actual would be credited to Income Statement.
Decreasing in demand of oil impacted to fall in price, but cost productions tend to rise. Gross
margin of the company would be decreasing. Stocks price of the company fall from $50 in 1997 to $25
in 1998. Company wanted to improving stock demand through profit that could be earned by the
company. Furthermore, Halliburton Company had asbestos litigation. Those were causing Halliburton
attempting to earn more revenues to keep their performance.

Action :
a. Halliburton’s violation:
1. Halliburton Company had violated the Objectivity Principle. Company’s claim based on
their consideration upon over the cost project that can lead as revenue without agreement
with clients. It could be bias calculation and information for financial report user.
2. Halliburton Company had violated the Consistency Principle. The company changed
revenue recognition without changed in another account. They should provide historical
information and prospect impact on their changing recognition policy.
3. Halliburton Company had violated the Convention of Conservatism. The company
overstated revenues, which was revenue must be understated booked.
4. Halliburton Company had violated Full Disclosure Principle. The Company should explain
why they changed the policy and what would be impact on their changes. So financial
report user could be provided clarity information.
5. Halliburton Company had violated Revenue Recognition. In the principle, company should
recognize the revenue appropriate by progress on completion of the projects. The
company had overstated revenues as much as $89 million in 1998, $98 million in 1999,
$113 million in 2000, and $234 million in 2001.

b. Halliburton’s advocacy:

1. Halliburton claimed that 10 of the 15 construction companies used the same accounting
method.
2. The reason why the company did not disclosure in accounting changes, because $89 million
in 1998 unmaterial value of $17 billion revenues in 1998.
 c. Rules of Revenue Recognition
1. US GAAP
FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements
of Business Enterprises, indicates that revenue is recognized when it is realized or
realizable and earned. However, beyond those broad guidelines, a single, comprehensive
revenue recognition standard does not exist in U.S. GAAP. Rather, guidance on revenue
recognition is found in a collection of transaction-specific, industry-specific, or other
specialized guidance. Further, the SEC staff provides detailed guidance on revenue
recognition for U.S. public entities in Staff Accounting Bulletin (SAB).
2. PSAK
On paragraph 20, PSAK 23 state that “ If revenues relate with services can be well
estimated, so revenues are recognized on completion of the transaction by the end of
reporting period.”
3. IFRS
The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This
core principle is delivered in a five-step model framework.

Result :

a. Result

Because of the issues of Halliburton company, public trust getting worse. That was showed
with loyal investors leaved the company and customer chosen another company. Even though
amount of overstate revenues unmaterial for whole revenues, but It could materially impact
towards profit. If company did not overstate the revenue, then company had a few losses and
boosted their profit.

b. Conclusion

Halliburton Company violated the US GAAP Principles, those were objectivity, consistency,
convention of conservatism, revenue recognition, and full disclosure. The company changed
accounting practices not because the new practice better reflected the economic transition, but
Halliburton had a difficult operating by fallen of the oil prices and asbestos litigation.

c. Suggestion

Halliburton Company could change the accounting method, disclosure should show
justification for another relevant-account of the changes. For comparative purpose, company
should show what historical results would have been had the accounting principles been applied
in previous years.