A firm that reports under IFRS is producing under a long-term contract for which it cannot measure the outcome reliably. In the first year of the contract, the firm has spent €300,000 and collected €200,000 in cash. What amounts related to this contract should the firm recognize on its income statement for the year?
Under IFRS, if the outcome of a long-term contract cannot be estimated reliably, the firm should expense costs when incurred, recognize revenue to the extent of the costs, and recognize profit only when the contract is complete. The firm does not need to recognize a loss when expenses arc greater than cash collected, bur would need to recognize a loss if it determined that a loss on the contract was likely.