Accounting Standard 7-Construction Contracts

ACCOUNTING STANDARD 7-CONSTRUCTION
CONTRACTS
 Applicable for accounting for construction

contracts in the financial statements of contractors
 Date on which contract activity is entered into and

the date when the activity is completed may fall in
different accounting periods
 Primary issue in accounting for construction

contracts is the allocation of contract revenue and
contract costs to the accounting periods in which
the construction work is performed.
1
DEFINITION OF TERM ‘CONSTRUCTION
CONTRACT’
 Is a contract(s) specifically negotiated for:
- construction of an asset or
- a combination of assets that are closely interrelated
or inter dependent in terms of
their design, technology and function or
their ultimate purpose or use.
 Construction contracts include:

- Contracts for rendering of services which are
directly related to the construction of assets
- Contracts for destruction or restoration of
assets
- Restoration of the environment following the
demolition of assets
2
DEFINITION OF TERM CONSTRUCTION CONTRACT
 When a contract covers a number of assets , construction of each asset
would be treated as a separate construction contract when
- Separate proposals have been submitted for each asset
- Each asset has been subject to separate negotiation
- Contractor and customer have been able to accept or reject that
part of the contract relating to each asset and
- Costs and revenue of each asset can identified
 A group of contracts, whether with a single or multiple customers, should

be treated as a single contract when the
- A group of contracts is negotiated as a single package
- Contracts are so closely inter related that they are, in
effect, part of a single project with an overall profit
margin.
- Contracts are performed concurrently or in a continuous
sequence.
3
DEFINITION OF TERM CONSTRUCTION CONTRACT
 Contracts for construction of an additional asset at the

option of the customer is to be treated as a separate
construction contract when:
- The asset differs significantly in design, technology or
function from the asset covered by the original
contract
- Price of the asset is negotiated without regard to
the original contract price.
4
CONTRACT REVENUE
 Comprises of :
- initial amount of revenue agreed
- Variations in contract work, claims and
incentive payments.
 Variation in contract work, claims and incentive
payments can be recognised provided
- It is probable that they will result in revenue
- They are capable of being reliably measured.
5
CONTRACT COSTS
 Comprises of :
- Costs that directly relate to the specific contract
- Costs that are attributable to contract activity in
general and can be allocated to the contract
- Such other costs as are specifically chargeable to the
customer in terms of the contract.
 Costs that cannot be attributed to a contract include:

- General administration costs for which reimbursement
is not specified in the contract.
- Selling costs
- Research and Development costs for which
reimbursement has not been specified in the contract.
- Depreciation on idle plant and equipment that is not
used on a particular contract.
6
RECOGNITION OF CONTRACT REVENUE &
EXPENSES
 Contract revenue on costs to be recognised with reference to
the stage of completion of the contract activity as on the
reporting date.
 Pre-requisites – fixed price contract

- Total contract revenue can be measured reliably
- Probable that economic benefits associated with the
contract will flow to the enterprise
- Both the contract costs to complete the contract and
the stage of contract completion at the reporting date
can be measured reliably
- Contract costs can be clearly identified and measured
reliably so that actual contract costs can be compared with
prior estimates
7
RECOGNITION OF CONTRACT REVENUE &
EXPENSES
 Pre-requisites – cost plus contract
- It is probable that economic benefits will flow to the
enterprise and
- The contract costs attributable to the contract, whether or
not specifically reimbursable, can be clearly identified and
measured
 Contract costs relating to future activity on the contract to be

treated as asset provided it is probable that they will be recovered.
 When the outcome of a construction contract does not meet the

above pre-requisites
- Revenue should be recognised only to the extent of contract
costs incurred of which recovery is probable and
- Contract costs should be recognised as an expense for the
period in which they are incurred.
8
RECOGNITION OF EXPECTED LOSS
 When it is probable that the total contract costs will

exceed total revenue, expected loss should be recognised
as an expense immediately
 This is irrespective of;

- Whether or not work has commenced on the contract
- State of completion of the contract activity
- Amount of profits expected to arise on other contracts,
which are not treated as a single construction
contract.
9
DISCLOSURES
 Contract revenue recognised

 Method used to determine contract revenue recognised
 Methods used to determine the stages of completion of
contracts under progress
 Gross amount due from/to customers for contract work
 For contracts in progress at the reporting date:
- Aggregate amount of costs incurred
- Recognised profits upto the reporting date
- Amount of advance received
- Amount of retentions
10

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ACCOUNTING STANDARD 7-CONSTRUCTION

 Applicable for accounting for construction

 Date on which contract activity is entered into and

 Primary issue in accounting for construction

 Construction contracts include:

 A group of contracts, whether with a single or multiple customers, should

 Contracts for construction of an additional asset at the

 Costs that cannot be attributed to a contract include:

 Pre-requisites – fixed price contract

 Contract costs relating to future activity on the contract to be

 When the outcome of a construction contract does not meet the

 When it is probable that the total contract costs will

 This is irrespective of;

 Contract revenue recognised

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