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Estimated loss
Total contract price 550 $m
Less costs incurred to date (225) $m
Less estimated costs to completion (340) $m
Estimated loss – costs not recoverable (15) $mFirst year.
Percentage complete Costs to date/total estimated costs: 225/(225 + 340) = 40%Statement of profit or loss
Revenue (40% x $550) =220
Cost of sales (balancing figure) = (235)
Loss = (15)Sir my question is related to the recognition of full amount of loss. Why do we recognize full loss in the first year? I know that IFRS 15 allows recognition loss in full in the first year in which you forecast that the contract is loss making.
Is it contrary to accrual concept?
If it is not, How this contract should be recorded in SPL in the second year?
Will the loss amount be shown in the SPL again in the 2nd year?
If you want a tutor response please post your questions to the ask tutor forum. Accrual concept recognises income and expense in the period to which it relates. If you enter into a “bad” contract this year, the loss accrues to this year – there is no contradiction. Full recognition is also consistent with the principle that the carrying amount of assets cannot be more than their “recoverable amount” (I am using this term loosely, this could be NRV, or ViU, etc). The recognition of foreseeable losses is also consistent with the concept of prudence.
IFRS 15 does not allow but requires recognition of the full amount of the loss. Once the loss has been recognised, in later years contract costs and revenue will be matched, so there is no further loss. Of course, if estimated costs to completion were understated, there could be further loss to be recognised, or if overstated, there would be a write-back of previously recognised loss (i.e. profit).
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