This instructional case provides four different scenarios that illustrate the inconsistent treatment of various executory contracts under current generally accepted accounting principles (GAAP). The purpose of the case is threefold. First, it provides students an opportunity to use the Financial Accounting Research System (FARS) to resolve several accounting issues related to long‐term executory contracts. Familiarity with FARS is essential, both for “real‐world” use when students enter the accounting profession and for success on the computerized CPA exam, which includes case research. Second, as the Financial Accounting Standards Board (FASB) attempts to move toward principles‐based standards (as opposed to rules‐based standards), the case provides students an opportunity to observe that GAAP seems to be rules‐based and theoretically inconsistent in the case of executory contracts. Third, the case can be used as a premise for discussing the standard‐setting process and exploring differences between the economic substance of a transaction and its legal form.
