Question

A contracting firm anticipates that it will incur costs in excess of the contract price on a particular contract. The firm has completed two years of work but the contract is only 60% complete. What portion of the entire anticipated loss is recognized as of the end of the second year? Which section of the authoritative literature best describes this situation and provides the appropriate guidance?

Answer 1

As you can observe, the firm is anticipating a loss. And also 60% of the contract is already completed.

As of the end the second year, the loss to the extent of 60% should be recognised because the project is already completed to that extent and the loss is also already incurred. And to the remaining 40% should create a contingent liability, because this loss is not yet incurred but is anticipated that it will definitely be incurred.

This is as per IFRS 37. That is the authoritative literature that best describes the above situation is IFRS 37 issued by IASB.