When are losses recognized for long-term construction-type contracts under U.S. GAAP?

Under U.S. GAAP, losses on long-term construction-type contracts are recognized immediately when they are discovered. This principle is rooted in the guidance provided by ASC 605-35, which governs the accounting for construction contracts.

When a contractor expects that the total costs to complete a project will exceed the total contract revenue, this indicates a loss situation. The loss must be recognized in the accounting period in which it becomes probable, rather than being deferred until contract completion or another milestone. This approach ensures that the financial statements present a realistic picture of the company's current financial position and performance, reflecting the liabilities that will need to be settled even if the project is only partially complete.

Recognizing losses immediately allows for better financial transparency and aligns with the conservative accounting principle, which emphasizes the importance of recognizing adverse financial outcomes as soon as they are foreseeable. This contrasts with how profits are treated, as they are generally recognized based on the percentage-of-completion method if certain criteria are met, and not until a profit is expected or realized.