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Hi Sir !!
in this question when we calculate the cost in the SPL we get a balancing figure of $43,200 but when calculating the value in SFP we take the cost mentioned in the question which is $52,000
why so? , what about the cost which we calculated . and when calculating the SPL why can’t we take $52,000 as cost and calculate revenue as a balancing figure I’m getting confused in this logic in the previous examples also since there can only be 1 cost incurred right why two different values in step 3 and step 4 which u do. I’m confused about this concept sir .With Regards,
RamHi,
There is a difference between what we have spent (costs to date) and what we recognise, which is then matched to the revenue generated.
We may have bought materials for use on the contract but these have yet to be used in carrying out the performance obligations, so cannot be recognised through profit or loss. We therefore record them as part of the contract asset and only recognise any costs in profit or loss that have been incurred. Think of these costs not yet recognised through profit or loss as similar to a prepayment but instead of recognising them as a prepayment they are recognised as part of the contract asset.
Thanks
Dear sir,
just to make things completely sure that I understood your explanation
(a) in the example the total cost is $60,000 in that $52,000 relates to cost incurred and $8,000 relates to expenditure on inventory for future use.
(b) $8,000 we completely ignore in both spl and sfp since it is not related to the current performance objective
(c) $52,000 gets shown in the contract asset a/c because as per the performa and the rules we recognize whatever is incurred to date
(d) now comes the last part which is spl can I assume that from the $52,000 spent there is a certain portion yet to be used to carry out the performance objective hence we only recognize $43,200 which is the balancing figure from step 3
Have I gotten it right this time sir?
And thanks a ton for taking your time and explaining to us
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