Loss-Making Contracts – Full and Immediate Loss Recognition

## Loss-Making Contracts – Full and Immediate Loss Recognition

### The Golden Rule

When total estimated contract costs exceed total contract revenue → entire expected loss must be recognised immediately as an expense, regardless of how early in the contract.

This follows the prudence principle — do not defer foreseeable losses.

### Step-by-Step CDR Approach

Step 1: Is it loss-making? → Total Estimated Cost > Total Contract Revenue?

Step 2: Calculate % completion (same cost-based formula; denominator = total estimated cost)

Step 3: Revenue to recognise = Total Revenue × % completion

Step 4: P&L loss already booked in current year = Revenue recognised − Costs incurred

(This will be negative, showing a loss)

Step 5: Total expected loss = Total Contract Revenue − Total Contract Cost

Step 6: Provision for excess loss = Total expected loss − |Loss already booked in Step 4|

### P&L Format for Loss-Making Contract

```

Dr. Contract Cost (actual costs incurred)

Dr. Provision for Excess Loss (Step 6 amount)

Cr. Contract Revenue (Step 3 amount)

Cr. Loss (total loss recognised in P&L)

```

### Interpreting the Provision

The provision ensures the full future loss is booked now. In subsequent years, as more loss is incurred, the provision is reversed and replaced by actual losses.