Toshibas Creative Accounting for Construction Contracts

Requirement 3 (a) For the illustrative Contracts X and Y described in the case, compute the percentage of completion, construction revenues, expenses, and gross profit (or loss) for each year, and balances in the construction in progress (net of partial billings and provision for loss, if any) and accounts receivable in the balance sheet at the end of each year. You should present the numbers according to (1) how you think Toshiba accounted for these contracts, and (2) how Toshiba should have recorded the contracts to comply with U.S. GAAP. Present your answers using the format provided by Table 1 (Panel A for Contract X, and Panel B for Contract Y).18 All the amounts should be in millions of yen (). (Hint: It might be helpful to prepare journal entries for each contract separately before completing the table.) (b) For Contract Y, calculate the loss, if any, that Toshiba should record at the inception of the contract to be compliant with U.S. GAAP. Explain your rationale and cite authoritative pronouncements. (c) For Contract Y, do you agree with the rationale of Toshibas management to not change the original cost estimate? Is Toshibas accounting treatment consistent with the provisions of U.S. GAAP? Cite authoritative pronouncements.

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The details of two illustrative contracts for which Toshiba used the percentage-of-completion method are provided below. 17 Contract X was accepted by Toshiba at the beginning of fiscal 2012 for 6,408.17 million, when the original estimate of the total contract costs was 4,806.13 million. Although the costs incurred and the cost estimates changed as the contract progressed (see table below), for reasons similar to those mentioned earlier, Toshiba did not change the original cost estimates. Contract Y was accepted by Toshiba at the beginning of fiscal 2012 for 1,336.13 million. Although the cost estimate at that time was 1,402.94 million and the contract was expected to incur a loss, Toshiba accepted the contract for competitive reasons. However, Toshiba did not record a provision for loss at the inception of the contract, relying on the assumption that future cost savings could be identified so that the total costs would not exceed the contract revenue of 1,336.13 million. As Contract Y progressed, the costs and cost estimates increased (see table below) and eventually, the total costs rose to 1,510.81 million, but Toshiba continued to account for the contract based on the initial cost estimate of 1,336.13 million. Management's rationale for this position was that it lacked reliable forecasts because its efforts to seek contract price increases and additional cost savings were under way. In 2014 , when the final cost data confirmed the costs to be 1,510.81 million, Toshiba recorded a loss on the contract of 174.68 million (revenues of 1,336.13 million minus expenses of 1,510.81 million)