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Accounting for unprofitable long-term contracts: A teaching note

Accounting for unprofitable long-term contracts: A teaching note. John Hathorn Presentation at the Allied Academies Conference April 17, 2010. Purpose. Unprofitable long-term contracts Framework should be the same Teaching methodology the same Capture the economic consequences

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Accounting for unprofitable long-term contracts: A teaching note

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  1. Accounting for unprofitable long-term contracts: A teaching note John Hathorn Presentation at the Allied Academies Conference April 17, 2010

  2. Purpose Unprofitable long-term contracts • Framework should be the same • Teaching methodology the same • Capture the economic consequences • Disclose actual costs of construction • Recognize provision for future losses

  3. Income statement disclosure Profitable contract

  4. Income statement disclosure Unprofitable contract - textbook

  5. Proposed Income statement disclosure

  6. AICPA SOP 81-1 • Amount of the loss added to COC • Unless material, unusual or infrequent Argue losses should be disclosed separately • Capture economic consequences • Important information regarding management’s performance • COC reflect actual costs incurred

  7. Conclusion • Methodology is the same • Records actual COC • For unprofitable contracts framework is overlaid with the conservatism principle

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