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forfeited performance bond
07-22-2010, 06:34 PM
Post: #1
forfeited performance bond
How do we treat forfeited performance bonds due to failure of bidder to pursue the contract as required? Should we credit it as revenue? if so, when do we recognize the income? is it during the period the bid was awarded? or during the period the bidder defaulted and contract is cancelled, supposing these 2 events ocurred in different accounting periods? thanks
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07-22-2010, 07:25 PM
Post: #2
 
what do u mean by forfieted performance bond? is it an equity instrument? debt? or option??<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by aya_girl</i>
<br />How do we treat forfeited performance bonds due to failure of bidder to pursue the contract as required? Should we credit it as revenue? if so, when do we recognize the income? is it during the period the bid was awarded? or during the period the bidder defaulted and contract is cancelled, supposing these 2 events ocurred in different accounting periods? thanks
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07-23-2010, 03:21 PM
Post: #3
 
im referring to cash bond that is posted by a supplier/bidder to guaranty performance of a project of our company.
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07-23-2010, 03:50 PM
Post: #4
 
Dear,

"A performance bond is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.
For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.
Performance bonds are commonly used in the construction and development of real property[1], where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects.
The term is also used to denote a collateral deposit of "good faith money"[2], intended to secure a futures contract, commonly known as margin[3].
Performance bonds are generally issued as part of a 'Performance and Payment Bond'[4], where a Payment Bond guarantees that the contractor will pay the labour and material costs they are obliged to." Wiki

So, recognition of such income is contingent upon failure of the counter party to perform his obligation. When such money is received it is credited as a liability until the completion of the contract. In case of failure of contractor the entity has legal right to forfeit such amount and it will be recognized as an income in the period in which the legal right has been ascertained.
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