If you determine that total contract costs will exceed the total contract revenue, you can use the provision for foreseeable losses to recognize an expected loss on a project as an expense transaction
If total costs exceed the contract value on an estimate project, the surplus expenses will be shown with a negative value in the field on the tab in the form.
You can apply the provision for fixed-price projects and investment projects. If the total estimated costs on a project exceed the contract value, the loss is taken immediately. For investment projects, there is a maximum capitalization limit.
How losses are posted determines the project type, the matching principle, and fixed-price projects. In general, either accrued revenue will be reduced or costs will be accrued.
Fixed-price
projects
On a fixed-price project, a foreseeable loss can be detected when the total estimate cost exceeds the total contract value.
Set up using completed contract assessment
If the total estimated costs on the project exceed the contract value, costs beyond the contract value are accrued. The costs (amounts entered on the cost lines) are compared with the contract value. When the estimate is posted, the amount that exceeds the contract value is posted as an expense transaction on the WIP-accrued loss or credit account, and the accrued loss or debit account.
Set up using completed percentage assessment
If the total estimated costs on the project exceed the contract value, the amounts accrued as either sales value or profit, are reduced. The costs (amounts entered on the cost lines) are compared with the contract value. When you use the following principles, the estimate is posted and the amount that exceeds the contract value is posted accordingly.
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matching principle: and the accounts.
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matching principle: and the accounts.
Investment
projects
On an investment project, you must use the method of maximum capitalization. The maximum capitalization limit determines what the WIP value of the project costs can amount to. The project costs are compared with the maximum capitalization amount, and the amount that exceeds the maximum capitalization limit is posted as an expense transaction on the (credit) and the (debit) accounts.
Manually enter the maximum capitalization amount on the estimate. If the maximum capitalization limit is exceeded on a project, the surplus expenses will be shown in the field on the tab in the form.
Note
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Estimate values that have been entered manually will not be recalculated automatically if there is a loss and the foreseeable losses check box is marked. This is so you can record the percent complete value for reporting purposes.
