Recognition of loss understand, contract, recognized

nixie24

Dear all,

I am reading SS8 book 3, part revenue recognition of long term contract. Relating to percentage-of-completion method and completed-contract method, it is said that under either method if a loss is expected, the loss must be recognized immediately. I am not clear this point and don't understand how the loss is measured and when it is recognized.

It is very kind of you to make it clear for me by a simple example.

Thanks a lot.

My Best Regards,

Thu Thuy

sdada

while you recognize revenues under the percentage-of-completion method sooner than the completed contract method you havent had actually a cash inflow of these payments until the whole complation. Therefore if a loss occurs it must go through the income statement immediately on both methods.

draz

yeah. it illustrates the 'prudent' principle. while revenues are accounted for depending on which method you use, losses need to be reported immediately. I don't see how I can come up with an example for this, but when you do the Qbank this should be clear to you

shootingstar

Dear Thu Thuy,

The loss is recognized based on the remaining expected cost of completing the contract and the revenue to be collected from the contract.

For example:
you entered in to a contract for USD 1000 and the cost of the contract is estimated to be USD 800. Suppose after one year contract is 50% completed. Thus you will recognize USD 500 as revenue and USD 400 as cost. Now if at the end of year one, the cost of completing the remaining 50% of the contract is revised upward to USD 600 instead of earlier estimate of USD 400 then the excess of the cost over the revenue is immediately recognized as loss.

Hope this will clarify.

homie

Dear all,

Thank you very much for yr kindly explain.

As Alldbest's example about the percentage of completion method, USD 100 (600 minus 500) is recognized as a loss immediately at the end of the first year? Or USD 200 (600 minus 400)?

I still get confuse about the time when we recognize a loss in completed contract method. Taking data of your example but apply to completed contract method. Suppose the project will be completed at the end of the second year, so when will loss of USD 100 (or USD 200) recognized? Can it be recognized at the end of the second year?

Please feel free to help me more detail.

All your comments are appreciated.

My Best Regards,

Thu Thuy

JRossSter

for ALL methods - recognize loss when incurred. Can you remember that? If you cant then there are 6 books with confusing topics and you will need to up your game a bit

Penny-wenny

Dear Sundusg,

You don't understand my point. Of course the cost or exp. is obviously recorded when it is incurred. My point here about the loss. How can you recognize the loss if you don't wait until the closing book time? For both methods, even cost and revenue are based on the estimation, any exceed over estimation should be recognized immediately. But for the completed method, it is still waited until the completion of the project, so for long time of project we cant see the loss.

That is my point and confusion.



sundusg_ Wrote:
-------------------------------------------------------
> for ALL methods - recognize loss when incurred.
> Can you remember that? If you cant then there are
> 6 books with confusing topics and you will need to
> up your game a bit

Thu Thuy

kd26gioi

Dear Thu Thuy,

The loss is recognised immediately when u estimate that the cost of completing the remaining contract will be more than the earlier estimate and ur remaining revenues will not be able to absorb the cost.

In completed contract method, full revenue is recognised at completion of the contract. but if during the completion stage, the estimate to complete the contract revised upward and that cost is more than the revenues of the contract the excess amount is recognised as a loss immediately.

Hope this will clarify.

rgonzalez

Dear Alldbest and Sundusg,

Thank you very much for your kind explain and suggestion.

I think i got it clear enough right now. Hope after going through FSA and back to Qbank i will feel no more complication.

My Best Regards,

Thu Thuy

marsilni

Just think about it like this

Contract Price $1,000,000
3 year project

Year 1 actual costs $400,000
Estimated costs to complete $400,000
Total Projected Cost $800,000 (Yr 1 actual costs + estimated costs to complete)
Total Project Gross Profit $200,000 (Total Contract Price - Total Projected Cost)

Under % of Completion you would record the following:
Revenue $500,000
Expenses ($400,000)
Gross Profit $100,000

Calculated as follows:
You divide the Actual Costs to date by the estimated total project costs
$400,000 / $800,000 = .50 (so you are 50% complete)

50% of the Contract Price $1,000,000 * 50% = $500,000
Actual Expenses = $400,000
and the Gross Profit is the net of the two and you can also check your gross profit by calculating 50% of the Project Gross Profit ($200,000 * 50% =$100,000)

Under the Completed Contract Method you would record the following:
ZERO

Now let's move on to year 2
Year 2 actual costs to date $800,000
Estimated costs to complete $400,000
Total Projected Cost $1,200,000 (Yr 2 actual costs + estimated costs to complete)
Total Project Gross Profit/(loss) ($200,000) (Total Contract Price - Total Projected Cost)

At this point there is an estimated loss of ($200,000), so you need to immediately recognize this loss under both methods.

For % of completion you go through the same steps as above, getting the % complete and figuring out the estimated loss for the project on a lifetime to date basis
Revenue $666,666 (Total Revenue Revenue)
Expenses ($800,000) (Cumulative Year 1 and Year 2 )
Gross Profit ($133,334) (net of two)

So in year 2 you would record the following
Revenue $166,666 (Total Revenue - previously recorded revenue) ($666,666 - $500,000)
Expenses ($400,000) (Year 2 expenses)
Loss ($233,334) (net of two)

Cumulative Gross Profit ($133,334) (Year 2 loss of ($233,334) - Year 1 profit of $100,000)


Calculated as follows:
You divide the Actual Costs to date by the estimated total project costs
$800,000 / $1,200,000 = .666 (so you are 66% complete)

66% of the Contract Price $1,000,000 * 66% = $666,000
Actual Expenses = $400,000
and the Gross Profit is the net of the two and you can also check your cumulative gross profit by calculating 66% of the Project Gross Profit/(loss) ($200,000) * 66% = ($133,334)

For the Completed Contract, you would record a loss of ($200,000) in year 2

Hope this helps!