## When Outcome Cannot Be Estimated Reliably

### When Does This Situation Arise?

In the early stages of a contract, when the contractor cannot reliably estimate:

Total contract costs
Stage of completion
Whether the contract can be fulfilled

### The Rule

Revenue recognised = Contract costs incurred (only to the extent recovery is probable)
No profit is recognised
Contract costs are expensed as incurred

Result: Zero profit for the period (break-even recognition).

### Why This Approach?

Since the contractor cannot estimate if the contract is profitable, it is too aggressive to recognise any profit. Revenue = Cost preserves conservatism while still reflecting that work is being done.

### P&L Format

```

Dr. Contract Cost xxx

Cr. Contract Revenue xxx ← same amount as costs incurred

```

### Important: Loss Still Recognised Immediately

Even when outcome is unreliable, if an expected loss exists it must still be recognised immediately (prudence still applies).

### When Does This End?

Once the outcome can be reliably estimated → switch to the Percentage Completion Method prospectively (treated as change in accounting estimate).

Worked example

### Example 1

Example: Outcome Unreliable

Costs incurred in Year 1: ₹30 lakhs

Future cost/completion: Cannot be estimated reliably

Treatment:

Revenue recognised = ₹30 lakhs (= costs incurred)
No profit recognised

Dr	₹	Cr	₹
Contract Cost	30	Contract Revenue	30

Net P&L impact = ₹Nil

Note: Do NOT apply % completion. Do NOT estimate total contract revenue × a percentage.

⚠️ Common exam mistakes

Recognising profit using a rough estimated % when the outcome cannot be reliably estimated — zero profit is the correct treatment.
Confusing 'outcome unreliable' (Para 33) with 'loss-making' (Para 32) — they are different situations: loss-making requires immediate full loss recognition; outcome unreliable requires break-even recognition.
Recognising zero revenue when outcome is unreliable — revenue equal to costs incurred (recoverable portion) must still be recognised.
Failing to recognise a known expected loss on an unreliable-outcome contract — if there is a foreseeable loss, book it immediately even in this situation.

Bare-Act text Para 33 (Uncertain Outcome) · AS 7 – Construction Contracts · click to expand

When the outcome of a construction contract cannot be estimated reliably: (a) revenue should be recognised only to the extent of contract costs incurred of which recovery is probable; and (b) contract costs should be recognised as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 32.

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When Outcome of Contract Cannot Be Estimated Reliably

Worked example

⚠️ Common exam mistakes