Billion in fy 2013 at the time the contract was

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billion in FY 2013 at the time the contract was signed. His request was based on the premise that the expected loss could indeed be restricted to ¥4.2 billion if specified cost reduction measures were implemented and common development expenses for the project were allocated to other contracts. CEO Tanaka did not grant permission to do so. When the contract commenced, the manufacturing part of the Smart Meter equipment (contract revenue amount of ¥17.8 billion) was accounted for on an inspection basis 12 , while the other parts of the contract, i.e., development, installation and maintenance (contract revenue amount of ¥14.1 billion) were accounted for under the percentage-of-completion method. For this latter portion of the contract, accounting was based on estimated costs of ¥14.1 billion. Project I In December 2010, SIS Company’s Railway & Automotive Systems Division received an order to provide electric equipment for subway trains with a delivery period of July 2013 through July 2015 for a price of $129 million (¥10.7 billion). This order pertained to 364 vehicles of which 4 were prototypes to be delivered by October 2012, and the remainder through July 2015. Cost estimates at the time of the order indicated that the project would incur a loss of ¥4.2 billion (approximately $51 million at the prevailing exchange rate). In exception to normal practice, the project was approved by the SIS Company President Toshio Masaki without having been deliberated at the company’s Order Policy Meeting. 12 Although inspection basis of accounting has not been specifically defined in the literature or by Toshiba, it is akin to the completed-contract method or the point-of-sale method of revenue recognition. 10
SIS Company used the inspection basis of accounting for Project I. Based on the design review with the client, it was determined (towards the end of FY 2011) that the project would incur a loss of $85 million. Soon after, the Railway & Automotive Systems Division managers identified several cost reduction measures, the implementation of which could reduce that loss or even make the project profitable. When this possibility was mentioned to CEO Norio Sasaki, he was openly skeptical, given the huge size of the anticipated loss in relation to the total price of the contract. At the end of FY 2011, Hideo Kitamura (the Executive Officer in charge of all business groups), and CFO Makoto Kubo decided not to record a provision for contract losses in that period on the grounds that “cost reduction measures and ways to increase the contract price were not yet determined." At that point, Kitamura strongly urged the SIS Company to implement the measures to get the project into the black and warned that they should be prepared to see the collapse of the Railway Systems Division if they were not successful because the projected losses on this contract would wipe out SIS Company’s entire FY 2011 profit. At the end of FY 2012, the projected loss on contract I was $41 million but SIS Company President Masaki continued to express optimism about the success of the cost reduction

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