A company has commenced work on a non-cancellable fixed price construction contract in the amount of $6 million.Costs of $4 million have been incurred to date, and it is expected that $3.2 million in additional costs will have to be incurred to complete the contract.The company adheres to IFRS.Which of the following statements with respect to the contract are correct?
A)The company has a constructive obligation to accrue a loss of $1.2 million plus any previously recognized profit.
B)This is an onerous contract, so the company must accrue a loss of $1.2 million plus any previously recognized profit.
C)There is a constructive obligation to finish the contract.
D)The company will have recognized $3 million in profit on the contract to date.

Question

Quizplus · Accepted Answer

The contract is onerous because the total expected costs ($4 million incurred + $3.2 million to complete = $7.2 million) exceed the contract price ($6 million), resulting in a loss of $1.2 million. Under IFRS, the company must recognize this loss.

A Company Has Commenced Work on a Non-Cancellable Fixed Price