3/21/2017 IAS11ConstructionContracts(studymaterial)

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IAS11ConstructionContracts(studymaterial) OBURAPGuide

Monday,January13,2014 Print Email 1

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Objective
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ThisStandarddealswiththeaccountingtreatmentofrevenueandcostsrelatedtoconstruction
contracts.Asnormallyintheconstructionindustrythedurationofprojectsspansbeyondoneyearand
projectworkusuallytakesmorethanoneaccountingyeartogetcomplete.Ultimately,itraisesthe
issuefortherecognitionofrevenueandcostsrelatedtoconstructioncontractintherelevantperiodin
whichconstructionworkwascarriedout.ThisStandardprovidesguidancefortherecognitionofcontract
revenueandrelatedcostsinthestatementofProfit&Loss,usingtherecognitioncriteriagiveninthe
RSSArticles
FrameworkforFinancialReporting.

Scope

TherequirementsofthisStandardareapplicableinthefinancialstatementsofContractorstoaccount LastAccounting
forconstructioncontracts. News

Definition M&ADealActivityReached
1.ConstructionContract: itshighestpointSince2008

Thecontractwhichisenteredinto,fortheconstructionofanindividualasset(houseoranOffice RecentACCAReportonthe
building)oragroupofassetsthatareinterdependentwithrespecttotheirdesign,functionor IncreasingscopeofShared
operationaluse(airportandrunway). Services

Theconstructioncontractsinclude: MicrobusinessesOpinion
withRegardstoMakingTax
(a)Contractsfortheconstructionoftheindividualassetorgroupofassets. DigitalProposal

(b)Contractsinvolvingdestructionorrestorationofoldassets. AccountantscanPlayan
ImportantRoleinReducing
2.TypesofContract: Corruption

a)FixedPriceContract AATHasBeenApprovedas
Acontractinwhichthecontractor&customerdecidesafixedsum/priceperunitofoutput. anApprenticeAssessment
Organization
b)CostPlusContract
Acontractinwhichthecontractoragreestoreceivealltheallowablecostofthecontractplusa IPSAS40,NewPublic
certaindecidedpercentageoftheallowablecostasprofit. SectorAccountingStandard
IssuedbytheIPSASB
CombiningandSegmentingConstructionContracts

Thisstandardappliestoeachcontractonindividualbasis.However,sometimes,entityneedsto IAASBReleasesitsTwo
ascertainthatwhetheracontractfortheconstructionofgroupofassetswillbetreatedasasingle yearWorkPlantoEnhance
contractoreachassetingroupofassetswillbetreatedasaseparatecontractinsuchcircumstances AuditQuality
theentityshouldapplythefollowing:

Allaccountingnews
Segmenting:

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3/21/2017 IAS11ConstructionContracts(studymaterial)

Forthecontractinvolvinggroupofassets,theeachassetshallbetreatedasaseparatecontractif:
(a)Eachassetwassubjecttoaseparateproposalsbycontractorand Have10minutestorelax?
(b)Thetermsofeachassetwasnegotiatedseparatelyandboththecontractorandcustomerhave
Playourunique
optiontoacceptorrejectthecontractrelatingtoeachassetinthegroupofassets
Balancegame
(c)Eachassethasidentifiablerevenueandcostonindividualbasis.
PlayTheGame

Combining:

Forthecontractinvolvinggroupofassets,thecontractaswholewillbetreatedasasinglecontractif:
(a)Thecontractorandcustomerbothhaveasinglecontractfortheconstructionofgroupofasset
(b)Theassetsinthegroupofassetsareinterdependentintermsoftheirdesignoruse,andseemsto
bethecomponentsofasinglecontractincommercialsubstance
(c)Thepartsofthewholecontractwillbecompletedinacontinuousmanner.

AmendmentintoContract:

Normallytheconstructioncontractincludesanamendmentclauseforbothcontractorandcustomer.If
thecustomerchoosestoamendtheoriginalcontractinordertoincludetheconstructionofanadditional
asset.Insuchsituationtheadditionalassetwillbetakenasaseparatecontractif:
(a)Theadditionalassetismateriallydifferentintermsofitsdesignorfunctionfromtheassetorgroupof
assetsundertheoriginalcontract
(b)Thecontractpricefortheadditionalassetissubjecttoseparatenegotiationirrespectiveofthe
originalcontract.

ContractRevenue

ContractRevenuemayincludethefollowingcomponents:

(1)Contractpricedecidedasperthetermsofthecontractand
(2)Anyrevenueinrespectofvariationsintheoriginalcontractworkrequiredbycustomer,ifitis
probable:

(a)Thatvariationandrelatedamountofrevenuewillbeapprovedbythecustomerand
(b)Revenuerelatedtovariationisreliablymeasurable.

(3)AnyrevenueintheformofIncentiveorefficiencypaymentsifitisprobable:

(a)Thatthecontractorwillmeetthespecifiedperformancestandardsand
(b)Revenueinrespectoftheincentivepaymentisreliablymeasurable.

ContractCosts

Thecostofthecontractincludesthefollowing:

(1)Thecostdirectlyrelatedtothecontractwhichincludes:

(a)Directmaterialandlaborcost
(b)Supervisioncharges
(c)Depreciationexpenseinrespectofplantandequipmentusedinconstruction
(d)Mobilizationanddemobilizationcosts
(e)Hiringchargesfortemporaryplantandequipment
(f)Designingandtechnicalassistancechargesrelatedtocontract
(g)Thirdpartyclaims

(2)Commoncostattributabletocontractonreasonableandconsistentbasiswhichincludes:

(a)InsuranceCost
(b)Generalandadministrativeoverheads
(c)SalaryExpenseofemployeesworkingonmultiplecontracts

(3)Othercostswhichisspecificallyrelatedtothecontractasperthecontractualterms.

Note:
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Note:

Thecoststhatareincurredinsecuringthecontractarealsothepartofthecostofthecontractif:
(a)Itisidentifiable,andreliablymeasurable
(b)thecontractisobtained.

RecognitionofContractRevenueandCost

Therecognitionofcontractrevenueandcostdependsupontheoutcomeofthecontract.Therefore,the
entityshallapplytheguidanceasfollowsif:

1)Outcomeofthecontractisreliablymeasurable:

Thecontractrevenueandcostsshallberecognizedinstatementofprofit&loss,onthebasisofstage
ofcompletionofthecontract,measuredattheendoftheaccountingperiod.

i)Determinationoftheoutcomeofthecontract

Theoutcomeofthecontractwilldeemedtobereliablymeasurableif:

ForaFixedPriceContract:

Forafixedpricecontract,theoutcomewilldeemedtobereliablymeasurable
Ifitsatisfiesthefollowingcriteria:
(a)Revenueofthecontractisreliablymeasurable
(b)Economicbenefitsrelatedtothecontractareprobabletoflowtotheentity
(c)Costsincurredandtobeincurredisreliablymeasurable
(d)Thestageofcompletionofthecontractismeasuredreliablyattheendofaccountingperiod

ForaCostPlusContract:

Foracostpluscontract,theoutcomewilldeemedtobereliablymeasurable
Ifitsatisfiesthefollowingcriteria:
(a)Economicbenefitsrelatedtothecontractareprobabletoflowtotheentity
(b)Costsincurredandtobeincurredisreliablymeasurable

ii)StageofCompletion:

Theentitywillmeasurethestageofcompletionofacontract,attheendofreportingperiodusingoneof
thefollowingmethods:

CosttoCostBasis:

Costtodate/(Costtodate+FutureCost)*100

PhysicalProportionorWorkCertifiedMethod:

WorkCertifiedtodate/TotalContractPrice*100

SurveyMethod:

StageofCompletionwillbeassessedbyqualifiedprofessional

2)Outcomeofthecontractisnotreliablymeasurable:

Theentityshallapplythefollowing:
(a)Thecontractrevenuewillberecognizedonlyuptotheextentofcostsincurredonthecontractto
date,ifitisrecoverable.Hencetherewillbenoprofitnoloss.
(b)Contractcostswillberecordedasexpenseintherelatedreportingperiod.

Note:

a)Ifthereisuncertaintyfortherecoveryoftheamountwhichhaspreviouslybeenrecordedascontract
revenueinstatementofprofitorloss,thenthesuchirrecoverableamountwillberecordedasan
expenseinstatementofprofitorloss,insteadofadjustmenttorecognizedcontractrevenue

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b)Ifinaparticularsituation,itisprobablethatentitywillnotbeable,eventorecoveritsallowablecost
incurredonthecontract,thensuchcostshouldberecognizedinstatementofprofitorlossinthe
relevantperiod

Thismaybethecaseinthefollowingsituations:

Contractswhicharesubjecttolegalproceedings

Inabilityofthecontractortomeetitsperformanceobligation

wherethecustomerisinfinancialcrises

RecognitionofExpectedLossesforOnerousContract

Ifforaparticularconstructioncontract,thecostofperformanceofthecontractexceedsthecontract
revenue,itwillbetreatedasonerouscontract.Insuchcircumstanceentityisrequiredtorecognizethe
expectedlossinstatementofprofitorloss,intheperiodinwhichcontractbecomesonerous.

Disclosure

1)ThisStandardrequiresthefollowingdisclosuresinrespectofconstructioncontract:
(a)Contractrevenuerecognizedinthecurrentperiod
(b)theapproachusedbytheentityindeterminationofrevenuerecordedinthecurrentperiod
(c)theapproachusedbytheentityindeterminationofthestageofcompletionofcontractsattheendof
reportingperiod

2)Thedisclosuresshallalsoincludethefollowing:
(a)Costincurredtodateandprofitsrecognizedtodate
(b)Anyadvancesreceivedfromcustomertodate

3)Theentitywillpresentthefollowinginthestatementoffinancialposition:
(a)Amountduefromcustomerrelatedtocontractasanassetand
(b)Amountduetocustomersrelatedtocontractasaliability.

4)ThedisclosureshallalsoincludeanycontingentliabilitiesorassetsasperrequirementsofIAS37in
respectofanycontingentliabilitiesorassetwhichmayarisefromeventsaspenaltiesorexpected
losses.

IAS11WorkingsforFinancialStatement

(W1)StageofCompletion:
Aspermethodmentionedinquestion

(W2)EstimatedTotalProfit/(Loss)ontheContract:

TotalContractRevenue x

TotalContractCost (x)

EstimatedTotalProfit x/(x)

(W3)Profittodate:

Revenuetodate(TotalRevenue*StageofComp.) x

Costtodate(BalancingFig) (x)

Profittodate(TotalProfit*StageofComp,) x

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Profitalreadyrecognizeinpreviousyear (x)

Profitfortheyear x

(W4)StatementofProfitorLoss:

Revenue x

Cost (x)

Profit x

RectificationCostofErrorbyContractor (x)

ProvisionforOnerousContract (x)

Profitfortheyear x

(W5)Statementoffinancialposition:

Costtodate(Asgiveninquest.) x

Profit/(loss)todate x/(x)

ProgressBillings (x)

Duefrom/(to) x/(x)

WorkedExamples

Example1:(Contractsforwhichoutcomeisreliablymeasurable)

ABLTDisanentityengagesinconstructionbusiness&preparesitsfinancialrecordsto31December
everyyear.Inthecurrentyearended31December2013thecompanystartedtwocontractsexpectedto
takemorethanoneyear.Followingaretheextractsrelatingtoeachcontractat31December2013:

Contract 1 2

$'000 $'000

Totalcontractprice 11,000 2,400

Estimatedtotalcostofcontractat01Jan2013 8,000 1,800

Estimatedtotalcostat31Dec2013 8,000 2,500

Agreedworkcompletedat31Dec2013 6,600 1,680

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Progressbillingsinvoiced31Dec2013 6,000 1,760

Costsincurredto31December2013 7,800 1,440

Theentitycalculatesthepercentageofcompletionastheagreedvalueofworkcompletedtodate,tothe
totalcontractprice.

Required:
Prepareextractsoffinancialstatementsfortheyearended31December2013

Solution:

Step1:DeterminationofOutcomeoftheContract
Astheoutcomeofthecontractisreliablymeasurabletherefore,thecontractrevenue&costwillbe
recognizedonthebasisofstageofcompletion

Step2:CalculationofStageofCompletion(UsingWorkCertifiedMethod)

1 2
Contract

$000 $000

TotalContractRevenue 11,000 2,400

WorkCertifiedat31Dec2013 6,600 1,680

PercentageofCompletion (6,600/ (1,680/

*100 11,000)*100= 2,400)*100=
60% 70%

Step3:EstimatedTotalProfit/LossontheContract

$000 $000

TotalContractRevenue 11,000 2,400

TotalContractCost (8,000) (2,500)

EstimatedTotalProfit 3,000 (100)

Step4:Profittodate

$000 $000

Revenuetodate(11,000*60)/(2,400*70%) 6,600 1,680

Costtodate(BalancingFig) (4,800) (1,750)

Profittodate(3000*60%)/(100*70%) 1,800 (70)

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Profitalreadyrecognizeinpreviousyear

Profit/(Loss)fortheyear 1,800 (70)

Step5:StatementofProfitorLoss

$000 $000

Revenue 6,600 1,680

Cost (4,800) (1,750)

Profit/(Loss) 1,800 (70)

RectificationCostofErrorbyContractor

ProvisionforOnerousCont.(10030)Remainingloss (30)

Profit/(Loss)fortheyear 1,800 (100)

Step6:StatementofFinancialPosition

$000 $000

Costtodate 7,800 1,440

Profit/(loss)todate 1,800 (100)

ProgressBillings (6,000) (1,760)

Duefrom/(to) 3,600 (420)

Example2:(Contractsforwhichoutcomeisnotreliablymeasurable)

ABLTDisanentityengagesinconstructionbusiness.Itstartedacontractfortheconstructionofa
schoolbuildingforoneofitsclient,spanning2years.Thepriceofthecontractwasagreedtobe$4
million.
Thecontractwasstartedon01,January2013butunfortunatelyconstructionmaterialpricesstarted
increasingmateriallyfromlastfewmonthsafterthestartofthecontract,duetounforeseenreason.
ABLTDhasintimatedthecustomerfortheincreaseinmaterialpriceandrequestedforcompensationof
additionalcosts,butyet,theentityisunsureaboutthecompensationoftheadditionalcosts.
Therefore,outcomeofthecontractisnotreliablymeasurableattheendofthefirstaccountingperiod
31122013,astowhetherthecontractwillbeprofitableornot.

FollowingextractsareavailablefromtherecordsofABLTDrelatedtothiscontractatthefirstyear
ended31122013:

$000
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ContractPrice 4,000

CostincurredtoDate 2,400

Costlikelytoberecoverable 2,000

Progressbillingstocustomer 1,800

Required:
Prepareextractsoffinancialstatementsfortheyearended31122013.

Solution:

Step1:DeterminationofOutcomeoftheContract

Astheoutcomeofthecontractisnotreliablymeasurabletherefore,thecontractrevenuewillbe
recognizedonlyuptotheextentofcostsincurredonthecontracttodate,totheextentitisrecoverable.

Step2:StatementofProfitorLoss

$000

Revenuetodate(uptoextent,whichisrecoverable) 2,000

Costtodate (2,400)

Losstodate (400)

Step3:StatementofFinancialPosition

Costtodate 2,400

Losstodate (400)

ProgressBillings (1,800)

Duefrom 200

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