LONG-TERM
CONSTRUCTION
CONTRACTS
CHRISTINE YVON I. MANALO
BSA-III
CONSTRUCTION
CONTRACT
is a contract specifically negotiated for the
construction of an asset or a combination of
assets that are closely interrelated or
interdependent in terms of their design,
technology and function or their ultimate
purpose or use.
IAS 11
Construction Contracts provides requirements
on the allocation of contract revenue and contract
costs to accounting periods in which construction
work is performed. Contract revenues and
expenses are recognised by reference to the
stage of completion of contract activity where the
outcome of the construction contract can be
estimated reliably, otherwise revenue is
recognised only to the extent of recoverable
contract costs incurred.
OBJECTIVE OF IAS 11
The objective of IAS 11 is to prescribe the
accounting treatment of revenue and costs
associated with construction contracts.
Under IAS 11, if a contract covers two or more assets, the construction of
each asset should be accounted for separately if (a) separate proposals were
submitted for each asset, (b) portions of the contract relating to each asset
were negotiated separately, and (c) costs and revenues of each asset can be
measured. Otherwise, the contract should be accounted for in its entirety. [IAS
11.8]
Two or more contracts should be accounted for as a single contract if they
were negotiated together and the work is interrelated. [IAS 11.9]
If a contract gives the customer an option to order one or more additional
assets, construction of each additional asset should be accounted for as a
separate contract if either (a) the additional asset differs significantly from the
original asset(s) or (b) the price of the additional asset is separately negotiated.
[IAS 11.10]
TRANSACTION PRICE OF
CONSTRUCTION CONTRACTS
A construction contract may be either:
1. Fixed price contract; or
2. Cost plus contract.
There are two types of cost-plus contracts.
a. Cost-plus-variable-fee contract
b. Cost-plus-fixed-fee contract
CONSTRUCTION REVENUE
- is the total amount of consideration
receivable under the contract.
► Initial amount of revenue agreed in
the contract
► Variations in the contract
► Incentive payments
CLAIMS
- is an amount that the contractor
seeks to collect from the customer or
another party as reimbursement for costs
not included in the contract price.
► Delays caused by the customer
► Errors in specifications or design
► Disputed variations in contract work
CONSTRUCTION COST
-the incremental costs of obtaining the contract
and the cost of fulfilling a contract, which may be
further categorized as those that give rise to an
asset and those that are expenses as incurred.
► Costs the relate directly to a specific contract
► Costs that are attributable to contract activity
and can be allocated
► Those chargeable to the customer under the
terms of the contract
ACCOUNTING
If the outcome of a construction contract can be estimated reliably, revenue
and costs should be recognised in proportion to the stage of completion of
contract activity. This is known as the percentage of completion method of
accounting. [IAS 11.22]
To be able to estimate the outcome of a contract reliably, the entity must be
able to make a reliable estimate of total contract revenue, the stage of completion,
and the costs to complete the contract. [IAS 11.23-24]
If the outcome cannot be estimated reliably, no profit should be recognised.
Instead, contract revenue should be recognised only to the extent that contract
costs incurred are expected to be recoverable and contract costs should be
expensed as incurred. [IAS 11.32]
If the outcome cannot be estimated reliably, no profit should be recognised.
Instead, contract revenue should be recognised only to the extent that contract
costs incurred are expected to be recoverable and contract costs should be
expensed as incurred. [IAS 11.32]
The stage of completion of a contract can be determined in a variety of ways -
including the proportion that contract costs incurred for work performed to date
bear to the estimated total contract costs, surveys of work performed, or
completion of a physical proportion of the contract work. [IAS 11.30]
An expected loss on a construction contract should be recognised as an
expense as soon as such loss is probable. [IAS 11.22 and 11.36]
REVENUE AND COST RECOGNITION OVER TIME
REVENUE RECOGNITION OVER TIME
A company satisfies a performance obligation and
recognizes revenue over time if at least one of the
following three criteria is met:
1. Customer simultaneously receives and consumes the
benefits of the seller’s performance as the seller performs.
2. Company’s performance creates or enhances an asset
(for example, work in process) that the customer controls
as the asset is created or enhanced; or
3. Company’s performance does not create an asset with
an alternative use. In addition to this alternative use
element, at least one of the following criteria must be met:
REVENUE RECOGNITION OVER TIME
If criterion 1, 2 or 3 is met, then a company recognizes
revenue over time if it can reasonably estimate its progress
toward satisfaction of the performance obligations.
◆ Company recognizes revenues and gross profits each
period based upon the progress of the construction—
referred to as the percentage-of-completion method.
◆ If criteria are not met, the company recognizes revenues
and gross profit when the contract is completed, referred
to as the cost-recovery (zero-profit) method.
REVENUE RECOGNITION OVER TIME
PERCENTAGE-OF-COMPLETION-METHOD
-measuring the Progress Toward
Completion
-most popular input measure used to
determine the progress toward completion is
the cost-to-cost basis
PERCENTAGE-OF-COMPLETION-METHOD
Percentage-of-
Completion Revenue,
Costs, and Gross Profit
by year
REVENUE RECOGNITION OVER TIME
COST-RECOVERY (ZERO PROFIT) METHOD
-This method recognizes revenue only to
the extent of costs incurred that are expected
to be recoverable.
-Only after all costs are incurred is gross
profit recognized.
DISCLOSURE
amount of contract revenue recognised; [IAS 11.39(a)]
method used to determine revenue; [IAS 11.39(b)]
method used to determine stage of completion; [IAS
11.39(c)]
And for contracts in progress at balance sheet date: [IAS
11.40]
aggregate costs incurred and recognised profit amount of
advances received amount of retentions
PRESENTATION
The gross amount due from customers for contract work should
be shown as an asset. [IAS 11.42]
The gross amount due to customers for contract work should be
shown as a liability. [IAS 11.42]
THANK YOU
