As 7

Accounting Standard 7
ACCOUNTING STANDARD 7
CONSTRUCTION CONTRACTS
1. Construction Contract:
A construction contract is a contract for the construction of
- an asset or
- a combination of assets
that are closely interrelated or interdependent in terms of
- design,
- technology and
- function or
- their ultimate purpose or use.
Attention: Construction contracts include:
• Contracts for the rendering of services which are directly related to the
construction of the asset
• Contracts for destruction of assets or
• Contracts for restoration of assets.
2. Combining and Segmenting Construction Contracts:
Segmentation of Construction Contract Combination of Construction Contract
The construction of each asset shall be A group of contracts shall be treated

treated as a separate construction as a single construction contract when:
contract when:
a) Separate proposals have been a) the group of contracts is negotiated

submitted for each asset as a single package
b) each asset has been subject to b) the contracts are so closely
separate negotiation interrelated that they are, in
effect, part of a single project
P a g e | 25
c) the costs and revenues of each asset c) the contracts are performed
can be identified. concurrently or in a continuous
sequence.
3. Types of Construction Contract:
Types of Construction Contact
Fixed Price Contract Cost Plus Contract
A cost plus contract is a

A fixed price contract is a
construction contract in which the
construction contract in which
contractor is reimbursed for
the contractor agrees to a fixed
defined costs plus fixed
contract price
percentage of these costs
4. Recognition of Contract Revenue and Expenses
Recognition of Contract
Revenue
Outcome of a Outcome of a
construction contract construction contract
can be estimated can be estimated
reliably reliably
Percentage of Percentage of
completion completion method is
method is applied not applied
P a g e | 26
5. Factors determining the reliability of the outcome of Contract:

• Total contract revenue can be measured reliably;
• Both the estimated contract costs and the stage of contract
completion can be measured reliably; and
• Contract costs attributable to the contract can be clearly identified
and measured reliably
6. Percentage of completion method

The percentage of completion method, contract revenue is recognised as
revenue in the statement of profit and loss in the accounting periods in
which the work is performed.
Following steps will be applied
Step 1: Determination of Contract Revenue

Contract revenue should comprise:
(a) Initial amount of revenue agreed in the contract
(b) Variations in work: A variation is a change in the scope of the work
to be performed under the contract.
(c) Claims: A claim is reimbursement from the customer to the contractor
for costs not included in the contract price
(d) Incentive payments: Incentive payments are additional amounts paid
to the contractor if specified performance standards are met or
exceeded
Attention:
Variations, claims and incentive payments will be recognised if it is probable
that they will result in revenue
• Variation is included when it is probable that the customer will approve
the variation.
• Claim is included when it is probable that the customer will accept
the claim.
P a g e | 27
• Incentive payment will be included when it is probable that the

specified performance standards will be met or exceeded.
Step 2: Determination of Contract Cost

Contract Cost include:
(a) Specific Cost: Costs that relate directly to a specific contract
(b) Allocable cost: Some costs may be attributable to contract activity
in general and can be allocated to specific contracts
Note: These costs may be reduced by any incidental income that is not
included in contract revenue, for example income from the sale of surplus
materials and the disposal of plant and equipment at the end of the
contract.
Cost Excluded from Contract cost:

(a) general administration costs for which reimbursement is not specified
in the contract;
(b) selling costs;
(c) research and development costs for which reimbursement is not
specified in the contract; and
(d) depreciation of idle plant and equipment that is not used on a
particular contract.
Step 3: Determination of Stage of Completion:

An entity shall determine the stage of completion of a contract by using
following method:
(a) Cost to cost Method
= x 100
𝐶𝑜𝑠𝑡 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 𝑓𝑜𝑟 𝑤𝑜𝑟𝑘 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑒𝑑 𝑡𝑖𝑙𝑙 𝑑𝑎𝑡𝑒
𝑇𝑜𝑡𝑎𝑙 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
Note: Costs incurred for work performed to date do not include costs
relating to future activity, such as for materials or prepayments.
(b) surveys of work performed.
(c) completion of a physical proportion of the contract work.
P a g e | 28
Step 4: Calculation of Contract Profit or loss
Cumulative Revenue Recognised up to Reporting date xxx
[Total Revenue X % of Stage Completion]
Less: Revenue already recognised in prior years xxx
Revenue recognised in current year xxx
Less: Actual cost incurred in current yeas xxx
Profit or loss in current year xxx
Step 4: Provision for Expected loss on a Construction Contract

As per Para 35 of AS 7, when it is probable that total contract cost will
exceed total contract revenue, provision for expected loss should be
recognised as expense irrespective of
• whether or not work has commenced
• stage of completition of contract
• the amount of profit on other contract
Calculation of Expected loss on a Construction Contract
Total Estimated Contract Cost xxx
Less: Total Contact revenue xxx
Total Foreseeable loss xxx
Less: Loss already recognised xxx
Provision for expected loss xxx
P a g e | 29
7. Where outcome of a construction contract cannot be estimated

reliably:
When the outcome of a construction contract cannot be estimated reliably:
• Revenue should be recognised only to the extent of contract costs
incurred of which recovery is probable.
• Contract costs should be recognised as an expense in the period in
which they are incurred.
• Any expected loss on the construction contract should be recognised
as an expense immediately.
8. Disclosure Requirements:
Revenue and methods
• Contract revenue recognised as revenue in the period;
• Methods used to determine the contract revenue recognised in the
period; and
• Methods used to determine the stage of completion of contracts in
progress.
Contracts in progress
• Aggregate costs incurred and recognised profits/losses up to the
reporting date;
• Advances received; and
• Amount of retentions
Outstanding
• Gross Amount due from customers for contract work as an asset
• Gross Amount due to customers for contract work as a liability
Costs incurred xxx
Plus: Recognised profits xxx
Less: Recognised losses xxx
P a g e | 30
Less: Progress billings xxx
Amount xxx
If above amount is positive- Gross amount due from customers
If above amount is negative- Gross amount due from customers
P a g e | 31
P a g e | 32

As 7

Uploaded by

Copyright:

Available Formats

As 7

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

As 7

Uploaded by

Copyright:

Available Formats

Accounting Standard 7

2. Combining and Segmenting Construction Contracts:

Segmentation of Construction Contract Combination of Construction Contract

The construction of each asset shall be A group of contracts shall be treated

a) Separate proposals have been a) the group of contracts is negotiated

3. Types of Construction Contract:

Types of Construction Contact

Fixed Price Contract Cost Plus Contract

A cost plus contract is a

4. Recognition of Contract Revenue and Expenses

5. Factors determining the reliability of the outcome of Contract:

6. Percentage of completion method

Step 1: Determination of Contract Revenue

• Incentive payment will be included when it is probable that the

Step 2: Determination of Contract Cost

Cost Excluded from Contract cost:

Step 3: Determination of Stage of Completion:

Step 4: Calculation of Contract Profit or loss

Cumulative Revenue Recognised up to Reporting date xxx

[Total Revenue X % of Stage Completion]

Less: Revenue already recognised in prior years xxx

Revenue recognised in current year xxx

Less: Actual cost incurred in current yeas xxx

Profit or loss in current year xxx

Step 4: Provision for Expected loss on a Construction Contract

Calculation of Expected loss on a Construction Contract

Total Estimated Contract Cost xxx

Less: Total Contact revenue xxx

Total Foreseeable loss xxx

Less: Loss already recognised xxx

Provision for expected loss xxx

7. Where outcome of a construction contract cannot be estimated

Costs incurred xxx

Plus: Recognised profits xxx

Less: Recognised losses xxx

Less: Progress billings xxx

If above amount is positive- Gross amount due from customers

If above amount is negative- Gross amount due from customers

You might also like