Under FAS 81-1, aka ASC 605-35, estimated losses on long-term contracts must be recognized in the period in which the loss is estimated. My question for anyone with applicable experience or an otherwise informed opinion:
When calculating an anticipated loss, should any and all fixed costs be considered, even if those costs would be incurred in future period absent the contract?
An example:
On January 1, 20X1, total contract costs for a calendar-year project are estimated to be 1,200. Total revenue is expected to be 1,000. Thus we have an estimated loss of 200. Under simple terms, a loss provision of 200 would be accrued. What if, however, 300 of the total anticipated costs of 1,200 are fixed (e.g. absorption of machinery depreciation) and will be incurred in future periods whether or not the contract exists. Accruing the full 200 loss provision accelerates the recognition of fixed costs into an earlier period (January) than would have been recognized if the contract didn't exist (Feb-Dec).
When calculating an anticipated loss, should any and all fixed costs be considered, even if those costs would be incurred in future period absent the contract?
An example:
On January 1, 20X1, total contract costs for a calendar-year project are estimated to be 1,200. Total revenue is expected to be 1,000. Thus we have an estimated loss of 200. Under simple terms, a loss provision of 200 would be accrued. What if, however, 300 of the total anticipated costs of 1,200 are fixed (e.g. absorption of machinery depreciation) and will be incurred in future periods whether or not the contract exists. Accruing the full 200 loss provision accelerates the recognition of fixed costs into an earlier period (January) than would have been recognized if the contract didn't exist (Feb-Dec).