SMM AR2020 (page 129)
3 SIGNIFICANT ACCOUNTING POLICIES (CONT’D) 3.19 Revenue (cont’d) (i) Contract revenue (cont’d)
Estimates of revenues, costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management
For costs incurred in fulfilling the contract which are within the scope of another SFRS(I) (e.g. Inventories), these have been accounted for in accordance with those other SFRS(I). If these are not within the scope of another SFRS(I),
the Group will capitalise these as contract costs only if (a) these cost relate directly to a contract or an anticipated contract which the Group can specifically identify; (b) these costs generate or enhance resources of the Group that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and © these costs are expected to be recovered.
Otherwise, such costs are recognised as an expense immediately. Capitalised contract costs are subsequently amortised on a systematic basis as the Group recognises the related revenue over time. An impairment loss is recognised in the profit or loss to the extent that the carrying amount of capitalised contract costs exceeds the expected remaining consideration less any directly related costs not yet recognised as expenses.
Based on the above accounting policies (prudence accounting principle), SMM issue a profit guidance -
The Group is currently in the process of finalising its 1H2021 financial results, which is scheduled for release on 29 July 2021. Based on the latest information available, the Group has more visibility on the likely cost increases to complete the Group’s
ongoing projects in FY2021 and FY2022. The Group will be making full provisions for these increased costs in the 1H2021 financial results.
<Basically, it means that these ongoing projects are going to be
loss making. The accounting principle of Prudence guided losses to be immediately recognised>
Onerous Contract
https://www.investopedia.com/terms/o/one...ntract.asp
Dr Profit and Loss
Cr Provisions - Onerous Contract
The provisions made will be reflected under Notes to Accounts 20 Provisions (page 151)
Query - Since there are lot of estimation, isn't it easy for people to game the system?
<Management has to put up their best estimates, and auditors are supposed to challenge these estimation. How well they do their jobs is another thing. That is why Accounting is an art, not a science.>
Hope this helps.