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Accounting Standards
Applicable to Construction Industry
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By
contracts
Sellers of property & Those subject to capital gains etc. Those letting out property
Standards Applicable
to Construction Industry
Obvious standard Construction Contracts - AS 7 (revised 2002). In fact this has the minimum issues in application & sholuld be least applied. Numerous other standards become applicable & are practically relevant especially from a tax perspective namely :
AS 9 Revenue Recognition AS 2 Valuation of Inventories AS 16 Borrowing Costs AS 19 Leases AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003)
To supplement this one may also mention certain guidance notes. Reference may also be made to IFRS, FASB, (US GAAP), IFRIC (International Financial Reporting Interpretations Committee) Last but not the least : Accounting Standards notified u/s 145A of the Income Tax Act.
8th Jan 2010
Has also been held that : The argument based on accountancy practice has little merit if such practice cannot be justified by any provision of the statute or is contrary to it. in Tuticorin Alkalis case, 227 ITR 172 (SC). Where however the law is silent, and an appropriate commercial practice has to be considered in order to arrive at what would constitute income from the perspective of a businessman; courts increasingly relying upon accounting practices prescribed in AS. The manner of accounting entries passed, in the books of account of the assessee, though not conclusive may have persuasive value in deciding the correct income. . [Challapalli Sugar 98 ITR 167 (SC), CIT v. Nagarjuna Steels 171 ITR
663.]
8th Jan 2010
Construction Contracts
AS 7 (revised 2002).
What is a Construction Contract?
The activity of construction is not on the account of the person undertaking the construction - i.e. he is a contractor
E.g.- a contract is awarded for construction of godown or a mall The person awarded the contract is undertaking a " construction contract".
Objective of AS 7
The date when contract activity is entered into & is completed usually fall in different accounting periods. Therefore, the primary issue is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed. The objective of AS 7 is to prescribe the accounting treatment of revenue and costs associated with the construction contracts.
8th Jan 2010
Construction Contracts
AS 7 Provides
Meaning of a construction contract [#2] a contract specifically negotiated for the construction of an asset or a group of assets interrelated or interdependent in terms of design, technology, function, use or purpose. Either Fixed Price or Cost plus &includes contracts for the rendering of services which are directly related or contracts for destruction or restoration of assets, and the/or restoration of the environment [#4] When to Combine / Segment Construction Contracts [# 6 to 9] What is Contract Revenue : amount agreed initially in the contract, + revenue for variations, + claims and incentive payments that are (a) expected to be collected and (b) that can be measured reliably. What is Contract Cost : costs that relate directly to the specific contract, + costs attributable to the contractor's general contracting activity to the extent allocable to the contract, + other costs that can be specifically charged to the customer under the terms of the contract.
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DISCLOSURE
8th Jan 2010
amount of contract revenue recognised; method used to determine revenue; method used to determine stage of completion; and aggregate costs incurred and recognised profit amount of advances received amount of retentions
Jayant Gokhale FCA 8
AS 9 REVENUE RECOGNITION
Deals with basis for recognition of revenue in the P & L statement re: revenue arising in the course of the ordinary activities of the enterprise from
Does not apply to contractors Is generic in application i.e. does apply to Builders / Developers
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Implications
Recognition of Revenue by Real Estate Developers GN 23 (Issued 2006) Clearly states that only AS 9 applicable.
No interpretation in NACAS standards Agreements for the Construction of Real Estate IFRIC Interpretation 15 Effective Jan 2009
Whether Sale of Goods Completed service contract method recognises revenue in the rendering of services [#4.1 & # 7.1 (ii)]
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FAS 66
Financial Accounting Standards Board (FASB) has issued FAS 66 Accounting for sales of Real Estate FAS 66 prescribe several methods of accounting for the sale of Real Estate Transactions The various method specified by the standard are: Installment Method: Installment method apportions each cash receipt or payment from the buyer between Cost Recovered and the Profit in the ratio as total cost and total profit bears to the sales value. Cost Recovery Method : Profit is recognized in the Cost recovery method when the cash payment from the buyer for the principal payment and the interest payment exceeds the sellers cost of the property sold. Deposit Method : Under the deposit method, the seller does not recognize any profit, until virtual completion. Reduced profit Method : This Method postpones recognition of other profit until lump sum payments are made. A reduced profit is determined by applying discounting. Full Accrual Method : Full Recognition of Profit is done only when all the conditions specified in the standard are fulfilled. Net receivable are discounted at the appropriate interest rate. Percentage of Completion Method
Jayant Gokhale FCA 12
AS 16 Borrowing Costs
Qualifying asset
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Does not distinguish between fixed assets and current assets - can include inventory under certain circumstances Substantial period - subjective - but ASI 1 (interpretation) issued by ASB Carrying amount of the qualifying asset not to exceed NRV
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AS 2 (Revised)
AS 2 (1981) - specifically excluded application of this standard as it stated: This statements applies to valuation of all inventories except inventories of the following to which special considerations apply: (iii) Work-in-progress under long-term contracts, such as engineering, real estate development and construction projects; In contrast the revised AS 2 (Revised 1999) : This Statement should be applied in accounting for inventories other than: (a) work in progress arising under construction contracts, including directly related service contracts (see Accounting Standard (AS) 7, Accounting for Construction Contracts3);
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Other Stnadards
AS 19 Leases
EAC Opinion Vol XXVI Co. engaged in development of plots -may have lease income
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THANK YOU
Jayant Gokhale FCA
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