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Hello sir, If the question states that the project incurs a loss should the cost incurred whether development or as an asset cost should be capitalised or not? How to treat the cost when the project incurs a loss?
Where a contractor is forecasting a loss on a particular contract, calculate the amount to be recognised as revenue (probably as a percentage of the contract value) and then deduct from that recognised revenue the amount necessary to arrive at the total forecast loss
Say revenue recognised is calculated at $400 and there is a loss forecast amounting to $(70)
Then we need to recognise $470 as the costs because then we have $400 – $470 arriving at the forecast loss of $70
Does that answer you?
Thank you sir, but currently I’m doing IAS 38 development cost, and the book says should be capitalised when there is a flow of economic benefit. My doubt arises what if the contract or a project arises loss should we still be capitalising the development cost or should we treat it as an expenditure?
You need to separate out the twio separate topics
The first is for the recognition of contract losses (and that I have already explained to you)
The second is for the accounting for the intangible asset of research and development costsThese can only be capitalised where the project that is being developed is going to result in economic benefit flowing to the entity
If the project is estimated to be non-viable and will only result in a loss …. why is it still being developed? Some altruistic reason?
No, of course capitalisation should cease as soon as an overall loss is forecast. In addition, however much has already been capitalised will probably need impairment or a complete write off
But why continue with a project that is a forecast loser?
OK?
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