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?
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.
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