Accrual of Estimated Reserves and Estimated Liabilities and their Impact on Financial Results in the Accounting (Financial) Statements of Enterprises

Abstract

The purpose of the study is to consider the problems of formation of the valuation of estimated reserves falling under the requirement of FAS 5/2019 “Reserves” the contracts (orders) recognized as obviously unprofitable or loss-making after their conclusion, as well as the impact of existing liabilities on the financial results of enterprises, and the procedure for their recognition in the financial reporting statements. In the course of the work, the author substantiated and justified the necessity to accrue a reserve or provision for the impairment of work in progress (hereinafter referred to as WIP), when at the same time the contract (order) under which the WIP is formed is recognized as obviously unprofitable and the amount of estimated costs necessary to complete the production of the WIP (performance of work, services), as well as preparation for sale and implementation of the sale, significantly exceeds the amount of accumulated WIP. Practical recommendations are given for reflecting the mentioned above relevant reserves in accounting, the analysis of the existing approach to the reflection of estimated liabilities for obviously unprofitable contracts in accounting was carried out and the justification of the author’s vision of reflecting these transactions in accounting is given. The results of the study can be used to improve the quality and reliability of accounting information on estimated reserves and estimated liabilities and will also be useful when conducting an audit of the accounting (financial) statements of enterprises performing contracts that fall under the definition of obviously unprofitable according to paragraph a, article 2 of RAS 8/2010 “Estimated liabilities, contingent liabilities and contingent assets.” The methods of analysis, synthesis and logical research based on a creative information approach were used as tools.

Keywords

• work in progress
• estimated or valuation reserves
• estimated liability
• net sales value
• impairment
• obviously unprofitable contract