IAS 11 Construction Contracts Notes
Definitions
A
construction contract is a contract specifically negotiated for the
construction of an asset, (or combination of assets), that are closely
interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use.
A Fixed Price Contract is a
construction contract in which the contractor agrees to a fixed contract price,
or a fixed rate per unit of output, which in some cases is subject to cost
escalation clauses.
A Cost plus Contract is a
construction contract in which the contractor is reimbursed for allowable or
otherwise defined costs, plus a percentage of these costs or a fixed fee.
1.
Contract Revenue
Comprises
·
the initial
amount agreed in the contract, plus revenue from variations in the original
work, plus claims and incentive payments that:
o It is probable that they will result in revenue
o Can be measured reliably.
·
measure
revenue at the fair value of the consideration received or receivable.
2.
Contract Costs
Comprises:
·
Costs
directly related to the specific contract
·
Costs
attributable to general contract activity that can be allocated to the contract
·
Such other
costs that are specifically chargeable to the customer under the contract terms
o Refer to paragraphs 17-21 for included and excluded
costs.
Accounting
1. Contract Revenue
Two
or more contracts (same or different customers) should be accounted for as a
single contract, if:
i.
Negotiated together,
ii.
work is interrelated, and
iii.
Performed concurrently.
2. Separating Contracts
·
If the contract covers multiple assets, the
assets should be accounted for separately if:
o
Separate proposals were submitted for each asset;
o
The contract for each asset were negotiated
separately; and
o
The costs and revenues of each asset can be
identified.
Otherwise
the contract should be accounted for in its entirety.
·
If the contract provides an option to the
customer to order additional assets, the additional assets can be accounted for
separately if:
o
The additional asset differs significantly
from the original asset; and
o
The price of the additional asset is
negotiated separately.
Estimation
Of Outcome
|
|
Can be
estimated reliably
·
If the entity can make an assessment of the
revenue, the stage of completion and the costs to complete the contract
·
If the outcome can be measured reliably -
revenue and costs on the contract should be measured with reference to stage
of completion basis. Under this basis, contract revenue is matched with
the contract costs incurred in reaching the stage of completion, resulting in
the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed
·
When it is probable that the total contract
costs will exceed contract revenue, the expected loss is recognized as an
expense immediately.
|
Cannot
be estimated reliably
·
No profit recognized
·
Revenue recognized only to the extent costs
are recoverable
·
Costs are recognized as an expense when
incurred
·
Expected losses are required to be
recognized as an expense as soon as a loss is probable
|
Disclosure
·
The amount of contract revenue recognized as
revenue in the period
·
Methods used to determine the contract revenue
recognized in the period
·
The methods used to determine the stage of
completion of contracts in progress
·
The gross amount due from customers for
contract work as an asset (WIP that has not been expensed)
·
The gross amount due to customers for contract
work as a liability (prepayment from customers)
·
An entity is required disclose each of the
following for contracts in progress at the end of the reporting period:
o
The aggregate amount of costs and profits
(less recognized losses) to date
o
The amount of advances received
o
The amount of retentions.
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