Standard 7: Construction Contracts

Standard 7: Construction Contracts · Complied AI

(b)

costs incurred plus recognised profits

for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses).

44 An enterprise discloses any contingencies in accordance with Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date 2 . Contingencies may arise from such items as warranty costs, penalties or possible losses.

Illustration

This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the application of the Accounting Standard to assist in clarifying its meaning.

Disclosure of Accounting Policies

The following are illustrations of accounting policy disclosures:

Revenue from fixed price construction contracts is recognised on the percentage of completion method, measured by reference to the percentage of labour hours incurred upto the reporting date to estimated total labour hours for each contract.

Revenue from cost plus contracts is recognised by reference to the recoverable costs incurred during the period plus the fee earned, measured by the proportion that costs incurred upto the reporting date bear to the estimated total costs of the contract.

The Determination of Contract Revenue and Expenses

The following illustration illustrates one method of determining the stage of completion of a contract and the timing of the recognition of contract revenue and expenses (see paragraphs 21 to 34 of the Standard). (Amounts shown herein below are in Rs. lakhs)

A construction contractor has a fixed price contract for Rs. 9,000 to build a bridge. The initial amount of revenue agreed in the contract is Rs. 9,000. The contractor’s initial estimate of contract costs is Rs. 8,000. It will take 3 years to build the bridge.

By the end of year 1, the contractor’s estimate of contract costs has increased to Rs. 8,050.

In year 2, the customer approves a variation resulting in an increase in contract revenue of Rs. 200 and estimated additional contract costs of Rs. 150. At the end of year 2, costs incurred include Rs. 100 for standard materials stored at the site to be used in year 3 to complete the project.

The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed upto the reporting date bear to the latest estimated total contract costs. A summary of the financial data during the construction period is as follows:

(amount in Rs. lakhs)

Year 1

Year 2

Year 3

Initial amount of revenue agreed in contract

9,000

Variation

200

Total contract revenue

9,000

Contract costs incurred upto the reporting date

2,093

6,168

8,200

Contract costs to complete

5,957

2,032

Total estimated contract cost

8,050

8,200

Estimated Profit

950

1,000

Stage of completion

26%

74%

100%

The stage of completion for year 2 (74%) is determined by excluding from

contract costs incurred for work performed upto the reporting date, Rs. 100 of

standard materials stored at the site for use in year 3.

The amounts of revenue, expenses and profit recognised in the statement of profit

and loss in the three years are as follows:

Upto the

Reporting

Date

Recognised in

prior years

Recognised in

current year

Year 1

Revenue (9,000x .26)

2,340

Expenses (8,050x .26)

2,093

Profit

247

Year 2

Revenue (9,200 x .74)

6,808

2,340

4,468

Expenses (8,200 x .74)

6,068

2,093

3,975

Profit

740

247

493

Year 3

Revenue (9,200 x 1.00)

9,200

6,808

2,392

Expenses

8,200

6,068

2,132

Profit

1,000

740

260

Contract Disclosures

A contractor has reached the end of its first year of operations. All its contract costs incurred have been paid for in cash and all its progress billings and advances have been received in cash. Contract costs incurred for contracts B, C and E include the cost of materials that have been purchased for the contract but which have not been used in contract performance upto the reporting date. For contracts B, C and E, the customers have made advances to the contractor for work not yet performed.

The status of its five contracts in progress at the end of year 1 is as follows:

Contract

(amount in Rs. lakhs)

Total

Contract Revenue recognised accordance with paragraph 21

145

520

380

200

1,300

Contract Expenses recognised in accordance with

paragraph 21

110

450

350

250

1,215

Expected Losses recognised

in accordance with paragraph

Recognised profits less

recognised losses