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Contract loss making (IFRS 15) and accural concept

Forums › ACCA Forums › ACCA FR Financial Reporting Forums › Contract loss making (IFRS 15) and accural concept

  • This topic has 2 replies, 2 voices, and was last updated 6 years ago by yuska.
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  • December 10, 2018 at 10:02 am #488677
    yuska
    Member
    • Topics: 15
    • Replies: 11
    • ☆

    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) $m

    First 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?

    December 15, 2018 at 9:50 am #492031
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8300
    • ☆☆☆☆☆

    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).

    December 19, 2018 at 9:57 am #492304
    yuska
    Member
    • Topics: 15
    • Replies: 11
    • ☆

    Thank your reply. ? am grateful

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