One year later at December 31, 2022, that same contract in progress with the contract price of $1,000,000 now has an estimated total contract cost of $1,250,000 due to job inefficiencies, material price increases, and bidding errors. (Total cost to date of $100,000 / Estimated total cost of $800,000) * Total contract price of $1,000,000 = $125,000 of revenue earned Total cost to date at Decemis $100,000.įrom contract inception through December 31, 2021, Company ABC recorded $125,000 in revenue over time based on the formula below. The contract price is $1,000,000 and the estimated total contract cost is $800,000. Work began during the year ended December 31, 2021. If a company is unable to estimate and record such loss provisions reasonably on a job-by-job basis, the company is not meeting the requirements of GAAP.Ĭompany ABC has one contract in progress at Decemwhich contains a single performance obligation and no variable consideration or other unique terms. Additional cost factors to consider include variable consideration, non-reimbursable costs on cost-plus agreements, and costs on change orders defined as contract modifications. A company will want to make sure that it considers all direct cost types that are applicable to the contract’s performance obligations in computing the loss. That is, when the current estimates of total revenue (i.e., consideration) and total contract cost remaining to fulfill the job indicate a loss upon completion, the entire value of the loss would be recorded against a loss provision (i.e., an “accrued” contract expense and a liability) in the period that determination is made.Īlthough the wording changed slightly in the recently effective ASC 606 Revenue Recognition guidance, the concept remains the same. Generally accepted accounting principles or GAAP require the recognition of loss provisions in the period during which the loss becomes evident (Financial Accounting Standards Board Accounting Standards Codification 605-35-25-46 // FASB ASC-606-10-65-1).
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