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In the video lecture pertaining to the revenue recognition of a loss making contract (https://www.youtube.com/watch?v=F0sWlGlEGCE), the tutor explained that in case of a lose making contract, as per Prudence concept the entire loss would be recognized.
However, my question is wouldn’t the probable loss in contract make it onerous? So a provision of an equal amount would be created as per IAS 37 Provision, Contingent Liabilities and Assets instead of reporting the loss.
I would be grateful if you could provide with appropriate reasoning and details for this problem. Also if you can help me with relevant sections of the standard explaining the same?
I believe this is an onerous contract because the unavoidable cost to complete the contract exceeds the benefit derived from it.
Please correct me if I am wrong.
I can see where you’re coming from but with a loss making contract under IFRS 15 we are providing a service where we have a contract with a customer and the costs are currently expected to exceed the revenue generated from the contract. If could still ultimately be profitable if the costs estimated were to be different.
With an onerous contract we aren’t likely to be selling something or providing a service through a contract with a customer, instead we have entered a contract where we are under an obligation to make future payments, e.g. with lease payments on a property, and so would provide for the full amounts under the contract if we do not expect to gain any benefits from the use of the property.
Ultimately, the key is whether there is a contract with a customer.
Thanks
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