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IFRS
IAS11ConstructionContracts(studymaterial) OBURAPGuide
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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
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Theentitycalculatesthepercentageofcompletionastheagreedvalueofworkcompletedtodate,tothe
totalcontractprice.
Required:
Prepareextractsoffinancialstatementsfortheyearended31December2013
Solution:
Step1:DeterminationofOutcomeoftheContract
Astheoutcomeofthecontractisreliablymeasurabletherefore,thecontractrevenue&costwillbe
recognizedonthebasisofstageofcompletion
Step2:CalculationofStageofCompletion(UsingWorkCertifiedMethod)
1 2
Contract
$000 $000
Step3:EstimatedTotalProfit/LossontheContract
$000 $000
Step4:Profittodate
$000 $000
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Profitalreadyrecognizeinpreviousyear
Step5:StatementofProfitorLoss
$000 $000
RectificationCostofErrorbyContractor
ProvisionforOnerousCont.(10030)Remainingloss (30)
Step6:StatementofFinancialPosition
$000 $000
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
Source:ReadyRatios.com Share:
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3/21/2017 IAS11ConstructionContracts(studymaterial)
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