onerous contract and example

The video discusses the concept of owner's contracts in the construction industry, explaining how such contracts can become unprofitable due to rising costs. It highlights the importance of recognizing losses promptly, following the prudence and conservative principles of financial reporting.

Key points include:

Owner's Contracts Definition: These contracts can turn unprofitable due to unforeseen costs, such as a significant increase in building materials, as discussed between 00:00 and 00:40.

Recognizing Losses: When a contract is identified as an owner's contract due to expected losses exceeding revenues, the entire loss must be recognized in financial statements. This concept is elaborated upon from approximately 00:54 to 01:48.

Example and Calculation: The speaker provides a detailed example of a contract over three years, analyzing costs, revenues, and profits through calculations that show how to determine profitability and recognize losses. This is explained through specific years - 2018, 2019, and 2020 - with detailed numbers provided in the latter parts of the video, especially from 01:57 to 16:34.

Impact of New Information: The concept of adjusting recognition based on new information is illustrated, specifically when total costs were lower than previously estimated in 2020, marking the contract as profitable.

Journal Entries: The speaker walks through necessary journal entries to reflect the changes in profit and loss recognition due to the evolving understanding of contract profitability. This detailed explanation can be found between 20:50 and the end of the video.

Overall, the video serves as an educational resource for understanding how to manage contracts, recognize losses, and adjust financial statements in construction accounting.

Key terms:
onerous contract, example, expect loss recognition, construction contract, percentage of completion, journal entries for onerous contract, IFRS, revenue recognition