BuildCo: A Contract That Has Turned Loss-Making

Measure of progress

• Cumulative cost incurred / total estimated cost = 1,100 / 1,950 = 56.4%
• Cumulative revenue = 1,800 × 56.4% = PKR 1,015.4m
• Cumulative cost = PKR 1,100.0m
• Cumulative result = loss of PKR 84.6m

Current year

	Current year (PKR m)	Cumulative (PKR m)
Revenue	1,015.4 − 720.0 = 295.4	1,015.4
Cost	1,100.0 − 680.0 = 420.0	1,100.0
Result	(124.6)	(84.6)

The further charge: onerous contract The contract as a whole is now expected to lose 1,800 − 1,950 = PKR 150m. Only PKR 84.6m of that has been recognised through the cost-to-cost measure. The remaining forward loss of 1,800/1,950-based measure - PKR 65.4m - relates to work not yet performed and must be provided for in full now (IAS 37 onerous contract; the loss is unavoidable because the contract is expected to be completed at a loss).

Total current-year charge = 124.6 + 65.4 = PKR 190.0m, which reconciles: prior-year profit of 40.0 less 190.0 = cumulative loss of 150.0, equal to the total expected contract loss. That reconciliation is the check the examiner is looking for.

Balance sheet: a contract liability rather than an asset arises, because cash received plus revenue recognised is less than the loss provision plus costs incurred. Invoice practice and advances must be assessed separately for the contract-asset/liability classification.

Judgement point: the 90m of demolished work does not depict progress. Some argue it should be excluded from the numerator (progress = 1,010/1,950 = 51.8%). Whichever presentation is used, the total loss recognised cannot exceed PKR 150m - the provision captures the difference.

No - not on these facts.

Step 1: is there a contract modification? IFRS 15 requires a modification to be approved by both parties, and approval may be written, oral or implied by customary business practice. A bare verbal agreement from the client, with no signed variation and no established course of dealing, is weak evidence of approval. Legal confirmation is needed on whether the client's representative had authority.

Step 2: if approved, is the new scope distinct? Additional design and build scope that integrates with the existing plant is not distinct - it is part of the single combined performance obligation, so the transaction price is updated cumulatively and the effect recognised as a cumulative catch-up.

Step 3: the constraint (the decisive point). The PKR 120m is variable consideration. It can be included only to the extent that it is highly probable that there will be no significant reversal when the uncertainty resolves. A 70% probability of recovery is probable, which is the IAS 37 threshold - not the IFRS 15 threshold. 'Highly probable' in IFRS 15 is set deliberately above 'probable'. On a 70% assessment, the amount is constrained to nil.

Step 4: what would change the answer

• A signed variation or written instruction → recognise.
• Confirmed approval plus a track record of the client paying similar claims, supported by a quantity surveyor's assessment of recoverability → recognise the reliably measurable portion.
• Partial recognition is permitted where only part of the claim is highly probable.

Consequence of misrecognition: recognising 120m would convert a cumulative loss of 84.6m into a cumulative profit of 35.4m - a swing of PKR 120m on the reported result. This is a high-audit-risk area, and the recoverability of the claim plus the recoverability of the contract asset should both be tested. Disclose the claim as a contingent asset only where an inflow is probable (IAS 37), and never credit it to revenue before the constraint is satisfied.

Recognise the nature of the pressure. This is a request to override an accounting standard using an anecdotal argument, at a point where the contract is already loss-making and the reported result is under strain. The threat is one of self-interest and intimidation for the financial controller, and the proposed treatment is not a matter of judgement within a range - the constraint in IFRS 15 is a bright line that 70% does not clear.

Practical response

1. State the position in writing, not verbally, citing the standard rather than personal opinion: 'highly probable' (IFRS 15) is a higher threshold than 'probable' (IAS 37); a bare verbal instruction does not meet the approval criterion.
2. Quantify the consequence: 120m of revenue on a contract with a 150m expected loss changes the reported result from a loss to a profit and would likely breach a covenant or a profit forecast. That framing converts an accounting debate into a governance one.
3. Offer a legitimate route: obtain signed client confirmation or an independent quantity surveyor's report before year-end; if the evidence arrives, book it. This shows willingness to be persuaded by evidence, which protects credibility.
4. Document and escalate if the instruction is repeated - to the audit committee chair, and to the external auditors as part of the fraud-risk discussion (a deliberate misstatement intended to influence users is fraud, not error).
5. Check the code of conduct: most professional bodies require the member to avoid being associated with misleading information, and permit disclosure to a third party in limited circumstances after exhausting internal routes.

Tone matters. A controller who says 'that is not permitted' invites a confrontation. A controller who says 'here is the evidence I need and here is what happens to the covenant if I book it without that evidence' makes the finance director the author of the risk.