On the case study on OKP, I dont quite understand how is the book order inflated with the statement below:
“The conventional way of doing the order book is to reduce its amount when revenue is recognized according to a project’s percentage of completion. However, OKP’s internal policy is to remove a project from the order book when it is 100% completed. This means the order book figure is inflated and makes guidance on future revenue and profit difficult to gauge.”
An order book of $500m means that the company is expected to record $500 in revenue in the near future. In the normal case of reporting, when a company completed $100m in order book, they should be reporting $400m for the next reporting. The case with OKP was like this:
OKP’s order – $500m order book (this is not actual figure, I am using as example)
Number of project – 2 (First project $200m while other project $300m. Total order book $500m)
For instance, if OKP completed half of project 1($100m) in 1Q2020 so instead of reporting $400m order book in 2Q2020, they reported $500m. The reason was because they will remove project 1 order book only when fully completed at $200m. Hence, in such cases, the management is very aggressive with their reporting.
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