Entity A is constructing a building for its customer. The construction is in the second year of a three year project.

Management had originally assessed the contract to be profitable and recognised a profit in year 1 of EUR 40,000 based on the percentage of the contract that had been completed at that time. Management now believe the contract will incur a loss of EUR 60,000. 

Management have proposed that the loss of EUR 60,000 on the contract is recognised in year 2, but have questioned how the profit of EUR 40,000 recognised in year 1 should be treated. 

What would you suggest?