Estimating Expenses at the end of the year

Question

Hi,

My company has several construction projects ongoing and we use the Percentage of Completion method to record our revenue. Now, as you know POC is heavily reliant on the cost. This is where it gets a bit tricky.

Our contractors send us invoices with a 2-3 month delay. So, for example an invoice for the work completed in November will be received in February after discussions and negotiations. The accounting department makes a reliable estimate of the cost from the contractor and books it for the month in order to calculate the revenue for the period based on POC.

Now, however; our financial year has come to a close in December and we are receiving invoices for November this month (Feb 2014) and there are differences between what had been estimated and the original invoice.

How should this be dealt with? We have already closed our accounts for the previous year.

Is it okay to just adjust our estimate for the current period thereby automatically correcting our revenue while leaving the previous year as it is?

Answer 1

I would look at this as a change in accounting estimates and IAS 8 should be followed.
IAS8.36 in self explanatory in this regard:

"The effect of a change in an accounting estimate........shall be recognised prospectively by including it in profit or loss in:
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects both.

IAS 8.37 "To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change"

So retrospective application is clearly excluded by IAS 8.