Provision for anticipated losss

This query is : Resolved

CA Arvind Kumar Sharma (Querist)
Follow

05 May 2009 Hello Sir,

If the Company is having a contract with a Client to provide some IT services and is known at the inception of the Contract itself that the Contarct is going to incurr a loss. e.g Expample in a contract of 3 years- Contracted Revenue of 100Mn with Contracted Cost of say 150Mn i.e anticipated loss of 50 Mn for the 3 years.

1. Do we need to provide for this loss in the books to make the net margin Zero?

2. If yes than should that entirely (i.e 50Mn) be provided at the inception or over the contract life?

Regards
Arvind

CA Shail Mishra

CA Shail Mishra (Expert)
Follow

06 May 2009 Arvind as per AS 29 a provision is to be created if -
1- There is outflow of resources in future
2- Amount can be measured.

Since in your case both of above conditions are satisfied company need to provide for the anticipated loss .

To your next question whole of the amount I mean 50Mn will be provided at the start of contract ie in the year in which you have anticipated loss. This is based on concept called conservatism.

Message likes : 1 times

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now