Question with regards to reliable estimates of a contract…
A firm that reports under IFRS has begun providing a product under a long-term contract for which it cannot reliable estimate the outcome. In the first year of this contract, compared to reporting under US GAAP, reporting under IFRS will cause the firm’s operating profit margin to be:
C. the same
Under IFRS, long-term contracts that are unreliable, revenue is recognized to the extent of the costs.
Under US GAAP, long-term contracts that are unreliable, revenue, expenses and profit are recognized at completion.
Based on the above I would say my answer is B. If revenue is recognized to the extent of contract costs then presumably revenue and expenses were reported for the first year. However, the correct answer is A. Why?