View source for Booking a Reserve for Loss on % of Completion Projects


We have a project where we need to book a reserve because there is not enough $$ left in budget to complete the project over the next 8 months (so, it'll go into next year). Our project manager has done an estimate to complete and we'd like to set up a reserve for the loss and recognize the entire loss this year. My question is, how should the expense part of the entry be booked? Should it be booked as an Overhead Expense or Direct Expense account? Thankfully we've never had to do this before, but our outside accounting firm tells us the proper thing to do is to recognize the loss now because we are aware of it now. Our thought initially was to debit revenue and credit a liability account, then relieve it as direct expenses are incurred over the next 8 months to complete the project. However, now our thinking is that we should debit an expense account (instead of involving revenue) and credit a liability account, then relieve it as direct expenses are incurred over the next 8 months. For audit purposes, I was worried about involving overhead or direct expenses. Is there a proper way to record this type of transaction?



SOP 81-1 paragraph 88 states that "the provision for loss should be accounted for in the income statement as an additional contract cost rather than as a reduction of revenue." I looked quickly in the codification and could not find the guidance there, so perhaps someone can help make that connection. Of course, this is subject to materiality. I think the reason most contractors make the adjustment to revenue is that it simplifies the adjustments that need to be made to get from the GAAP financials to the incurred cost submission.

[[Category: Accounting]]