For a contract that is expected to generate a loss, what is the recording treatment for this expected loss?

When a contract is expected to generate a loss, the appropriate accounting treatment is to recognize that expected loss immediately in the current period. This approach aligns with the accounting principle of conservatism, which dictates that losses should be recognized as soon as they are anticipated, while gains should only be recognized when they are realized.

By recognizing the loss immediately, the financial statements provide a true and fair view of the company's financial position. This helps stakeholders understand the potential risks and financial obligations associated with the contract, thereby facilitating better decision-making. This principle also ensures that the financial results reflect the economic reality of the situation, avoiding the deferment of losses which can lead to inflated asset values and misrepresentation of profitability.

In cases where losses are anticipated, waiting until project completion or spreading the loss over the contract duration would not provide stakeholders with timely and relevant information, which is why those approaches are not suitable for recognizing expected losses.