Loss Recognition

Loss occurs when a job or project has expected costs that exceed expected revenue. If you are using the Project Level feature and the Percentage of Completion (POC) revenue recognition method, you can recognize loss for a job or project as soon as a loss is anticipated, regardless of when the costs will incur.

The Loss Recognition feature allows you to automatically or manually select jobs and projects that are in a loss position and create a journal entry to accrue expected costs. If you want see how billing amounts are affected by the loss, you can also select whether to include billings in the loss recognition journal entry.

Example

A job has the following amounts:

Contract Earned (POC x Expected Contract) =$1250 (50% x $2,500)

Anticipated Margin (Expected Contract - Forecast Cost) = $500 ($2,500 - $2,000)

When an additional $1,000 in cost is anticipated, and a change order cannot be obtained, a forecast revision is posted.

These extra forecast costs affect the POC and contract earned, resulting in a loss for the period.

Contract Earned (POC x Expected Contract) =$833.33 (33% x $2,500)

Margin to Date Loss (Posted Cost - Contract Earned) =$166.67 ($1000 - $833)

In addition to the loss for the current period, the job is in an overall loss position, based on the anticipated margin and the costs that are yet to accrue.

Anticipated Margin (Expected Contract - Revised Forecast Cost) =$500 loss ($2,500 - 3,000)

Cost to Accrue (Anticipated Margin - Margin to Date) =$333.33 ($500 - $166.67)

Example Continued - with Billings

If you select to include billing amounts in the loss recognition, the loss recognition journal entry will also reverse the under billed/costs in excess (CIE) amount or the over billed/billings in excess (BIE) amount that is caused by the loss.

In the example above, the original Over/(Under) Billed amount is calculated as follows:

Over/(Under) Billed (Contract Earned - Billed) = $83.33 under billed ($833.33 - $750)

After the loss is recognized, the Contract Earned amount is adjusted:

Adjusted Contract Earned (Anticipated Margin Loss Posted Cost) = $500 (($500) $1,000)

The Adjusted Contract Earned amount is used to calculate the new over/(under) billed amount. Even though the job was previously under billed, the adjusted contract earned is now less than the billed amount:

Over/(Under) Billed (Adjusted Contract Earned - Billed) = $250 over billed ($500 - $750)

The adjustments to the CIE and BIE are recorded to indicate the difference between the new amounts and the amounts that are currently in the POC table.

Setting up Loss Recognition

To set up the loss recognition feature, you must:

• Select the Loss Recognition posting option, then select if to include billings.
• Set up the accounts to use for loss recognition.
• Set up the next document number for the loss recognition journal entry.

Choosing the Loss Recognition Posting Option

You can select the option to use job and project loss recognition if you are using the Percentage of Completion as the revenue recognition method. See Choosing Posting Options for information on the other posting options in this window.

1. Select Microsoft Dynamics GP > Tools > Setup > Job Cost > Job Cost Setup > Posting Options.
2. Mark the Use Job and Project Loss Recognition checkbox.
3. Mark the Automatically include all jobs and projects in a loss situation checkbox if you do not want to manually mark jobs and projects for inclusion in the loss recognition journal entry. If you select this option, any job or project that qualifies will be automatically marked for inclusion when the Loss Recognition Edit List is printed.
4. If you want to include billings in the calculation for the loss recognition journal entry, mark the Include Billings in Loss Recognition checkbox. See the example above for more information on including billings.
5. Select Save.

Setting up Loss Recognition Accounts

Complete the following steps to set up accounts for the loss recognition journal entry.

1. Select Microsoft Dynamics GP > Tools > Setup > Job Cost > Account Setup > Revenue Accounts. The Revenue Recognition Account Setup window opens.
2. Select a Division, then use the Revenue and Exp Accounts button to open the Revenue and Exp Account Setup window.
3. Provide account numbers for the following:
   • Costs of Loss Recognition
     The account for the cost expense (debit amount) in loss recognition journal entries.
   • Accrued Costs\Costs in Excess
     The account for the accrued costs or Costs in Excess (credit amount) in loss recognition journal entries.
   • Billings in Excess
     The account for the Billings In Excess (credit amount) in loss recognition journal entries.
4. When you are finished, select Save.

Setting up the Next Document Number

Complete the following steps to set the next document number for the loss recognition journal entry. The system will automatically assign the journal entry number based on the next document number.

1. Select Microsoft Dynamics GP > Tools > Setup > Job Cost > Job Cost Setup > Number Options to open the Doc Number Setup window.
2. Enter the Next Number for the loss recognition journal entry.
3. Select Save.

Including Jobs and Projects in Loss Recognition

Once the loss recognition feature is set up, you can recognize loss for jobs or projects that are incurring loss within a period. Identify the jobs and projects that are in a loss position, then select to include them in loss recognition. If the option to automatically include jobs and projects is turned on, any jobs and projects in a loss position will be marked automatically when the Loss Recognition Edit List is printed.

Including a Job in Loss Recognition

Complete the following steps to include a job in the loss recognition journal entry for the current period. If the job is assigned to a project that is marked for loss recognition, the job cannot be marked. An entry will be created for the project.

1. Select Cards > Job Cost > Job. The Job Maintenance window opens.
2. Select the job that you want to include in the journal entry.
3. Mark the Include in Loss Recognition checkbox to include the job in the loss recognition journal entry for the current period. This checkbox is disabled if the Use Job and Project Loss Recognition posting option is turned off.
4. Select Save.

Including a Project in Loss Recognition

Complete the following steps to include a project in the loss recognition journal entry for the current period. Projects can only be marked for loss recognition if they use the Project POC method, and if all jobs assigned to the project are in the same division. There will be one loss recognition entry that includes all jobs on the project.
When you mark a project, all the project's jobs will be considered. A loss will not be recorded unless the entire project is expected to end with a loss.

1. Select Cards > Job Cost > Project to open the Project Maintenance window.
2. Select the project that you want to include in the journal entry.
3. Mark the Include in Loss Recognition checkbox to include the project in the loss recognition journal entry for the current period. This checkbox is disabled if the Use Job and Project Loss Recognition posting option is turned off.
4. Select Save.

Printing an Edit List

The Loss Recognition Edit List allows you to view details for the jobs and projects that will be included in the loss recognition journal entry. Before month end, you can use this edit list to forecast the loss for the period and view the effect that the loss will have on the current month's Profit & Loss Statement.

If you are automatically choosing jobs and projects for loss recognition, they will be included when the edit list is printed.

1. Select Reports > Job Cost > Edit Lists > Loss Recognition Edit List.
2. Select the Year and Period that you are printing the report for. This report can only be printed for the current period.
3. Select Print.

The values on this report vary depending on whether billings are included in the loss recognition. If you are not including billings, you will see the Cost to Accrue. If you are including billings, you will see the Billed, Under Billed, Billings in Excess, Adjustment to Cost, Adjustment to CIE, and Adjustment to BIE amounts.

Creating a Loss Recognition Journal Entry

After posting the POC Entry and closing the period, you can create the loss recognition journal entry. Like the POC Entry, the loss recognition entry will be excluded from WIP reports.

1. Select Transactions > Job Cost > Loss Recognition Entry to open the Build Loss Recognition Entry window opens.
2. The Loss Recognition Journal Entry Number defaults based on the next document number that was specified during setup.
3. Enter a Description and select the Year and Period for the loss recognition journal entry. The entry will be created for the jobs and projects that were marked as in a loss position for the selected period.
4. Select Build.
5. When the entry is finished building, select Post to post the journal entry. The Loss Recognition Posting Journal report prints when you are finished.

The Job Profit and Loss Report will also display two additional fields from the loss recognition journal entry for jobs in a loss position:

• The Adjustment to Cost for Loss column indicates the adjustment to cost on the loss recognition journal entry.
• The Actual Cost plus Loss Adjustment column indicates the total cost plus the adjustment to cost from the loss recognition journal entry.

Viewing History

You can print the Loss Recognition Audit Report at any time to view loss for a period. This allows you to view historical loss information for jobs and projects.

1. Select Reports > Job Cost > Job Reports > Audit Reports > Loss Recognition Audit.
2. Select the Year and Period that you are printing the report for.
3. Select Print.

Like the edit list and posting journal, the information that appears on the audit report depends on whether billing was included in the loss recognition journal entry.

Note about Closed Jobs and Periods

When you open a closed job, and that job is in a loss position, the job will be included in the next loss recognition entry.

When you open a closed Job Cost fiscal period, the Loss Recognition Entry for the period is reversed, along with the POC Entry. When the period is closed again, the Loss Recognition journal entry must be posted again, along with the POC entry.