IAS : Recognition of Expected Losses and Changes in Estimates

1            Recognition of Expected Losses and Changes in Estimates

Any anticipated excess of total contract costs over total contract revenue should be recognised immediately.

This recognition should happen, regardless of:

1.Whether or not work has started on the contract.

Example:

You are going to build a financial services centre. You hire staff, machinery and materials. You travel to the site, and find that the land is subsiding. The client offers another site, but for the same contract price.

This would reduce your loss, but not eliminate it. Recognise the loss immediately.

2. The stage of completion.

3. The amount of profits on other contracts.

Example:

You have five separate construction contracts with the same client. Your project in France is hit by strikes, which means additional costs, and penalties for late completion. This will create a loss for the project, though the four other projects will make enough profits to cover the loss.

You must still recognise the loss on the French project immediately.

Changes In Estimates

The percentage of completion method is calculated on a cumulative basis, in each period. It is based on current estimates.  A change in estimates of final revenue, or costs, is recognised in the period that the change is made.