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Hello,
I apologise it this has been asked previously but I could not see it in the ask the tutor fourm.In the lectures of FR, chapter 16 Revenue from contracts with customers (IFRS 15), lecture 8 which is about loss making contracts,
Please can you explain why in this specific example it is prudent to recognise a loss on only $5m and not a loss of $7m (Given revenue is $18m and we are told in the question that costs to date are $25m)
If we only recognise a cost of $23m (and not the $25m given in the question) then how do we treat the other $2m? Is this some kind of deferred liability held in the balance sheet for future years? or is it recognised as an other expense and not part of cost of sales?
Many thanks in advance. Open Tuition has been an amazing resource for me and made studying ACCA accessible and possible.
Adam.Hi,
Apologies! I missed the question as there are becoming far too many posts coming from elsewhere and this one got omitted, sorry.
I can see your point in that the costs in the profit or loss account are recognised as 23 when we have incurred costs of 25, so why don’t we recognise an extra 2 to further increase the loss. We can’t recognise more of a loss than what we anticipate, that is being more prudent than we already are and we’re looking at the current expectations that we assume to be reasonable. The extra 2 is effectively a prepayment in that we’ve incurred the expense but we are going to recognise it in future periods, thus leaving the loss at our calculates figure of 5.
Hope that makes sense and thanks for the reminder.
Hi P2-D2,
No need to apologise at all. I really appriciate the help and answer.Thank you again.
Adam
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