Accounting Standard-7: Construction Contracts
Accounting Standard-7: Construction Contracts
Accounting Standard-7: Construction Contracts
CONSTRUCTION CONTRACTS
CA. PANKAJ AGRWAL B.Com(Hons), LL.B., FCA
DEFINITIONS
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.
DEFINITIONS
Fixed Price Contract is a construction contract in which the contractor agrees to a
DEFINITIONS
Cost plus Contract
Construction Contracts
It includes contracts for rendering of services which are directly related to the Construction of the asset Destruction or restoration of assets
Contract Revenue
It Comprises: Initial amount agreed Variations in the contract work, claims and incentive payments to the extent it is probable that they will result in revenue and can be measured.
Contract Revenue
A variation is an instruction by the customer for a change in the scope of the work to be performed under the contract. A claim 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.
Incentive payments are additional amounts payable to the contractor, if specified performance standards are met or exceeded.
Contract Costs
It comprises of :
Direct Costs
Attributable Costs
by reference to the stage of completion of the contract activity at the reporting date. Expected Loss to be recognised immediately.
Contract costs to complete and the stage of completion can be measured at the reporting date Contract costs attributable to the contract can be identified and measured
Stage of completion
Proportion of costs to the estimated total cost Surveys of work performed Physical proportion of contract work
Expected Loss
Expected Loss be recognised immediately when the total costs are likely to exceed the total revenue. Loss is to be recognised even if no work has commenced on the project. Irrespective of the stage of completion Irrespective of the profits accruing on other contracts.
Disclosure
Amount of Contract Revenue recognised Method used to determine the contract revenue Method used to determine the stage of completion For contracts in progress, it should also disclose:
Disclosure
Amount of advances received Amount of retentions Gross amount due from and due to customers.
ILLUSTRATION
Rs. In Lacs
YEAR I Initial amount of revenue agreed in contract Variation Total Contract Revenue 9000 9000
Contract Costs incurred 2093 upto the reporting date Contract costs to complete 5957 Total Estimated costs 8050
6168
2032
8200
0
8200
8200
ILLUSTRATION
YEAR I
Estimated Profit Stage of Completion 950 26%
YEAR II 1000
74%
YEAR III
1000 100%
ILLUSTRATION
Upto Recognised Reporting in prior year date Recognised in current year
Year I Revenue (9000 x 0.26) Expenses (8050 x 0.26) Profit 2340 2093 247 2340 2093 247
ILLUSTRATION
Upto Recognised Reporting in prior year date Recognised in current year
Year II Revenue (9200 x 0.74) Expenses (8200 x 0.74) Profit 6808 6068 740 2340 2093 247 4468 3975 493
ILLUSTRATION
Upto Recognised Reporting in prior year date Recognised in current year
Year III Revenue (9200 x 1.00) Expenses (8200 x 1.00) Profit 9200 8200 1000 6808 6068 740 2392 2132 260
B
520 450
C
380 350
D
200 250 55 55
TOTAL
1300 1215
40
(90) 250 250
30
(30) 100 55
70
15 1420 1215
C
100 380
D
45 200 55
TOTAL
205 1300
I. Progress Billing
J. Unbilled Contract Revenue K. Advances
100
45 -
520
80
380
20
180
20 -
55
25
1235
65 125
ILLUSTRATION Contd
Construction Contracts
Contract revenue recognised as revenue for the year ended 31st December XXX Aggregate amount of Contract costs incurred and recognised profits (less recognised losses) upto 31st December XXX for all the contracts in progress
1300
1435
ILLUSTRATION Contd
The amount of customer advances outstanding for contracts in progress as at 31st December XXXX Gross amount due from customers for contract work presented as an asset
125
220 (20)
TRF LIMITED
Profit on contract is recognised on percentage completion method. The stage of completion is determined as a proportion that contract costs [including the cost of WIP in factory relating to contracts entered into on or after 01.04.2003 to be in line with revised Accounting Standard 7, (AS7)] incurred for work performed upto the reporting date bear to the estimated total costs. Profit (contract revenue less contract cost) is recognised only when stage of completion is 40% or more when the outcome of the contract can be estimated reliably. When it is probable that the total cost will exceed the total contract revenue the expected loss is recognised immediately.
Mukand Limited
Accounting for Long Term Engineering Contracts: (a) Revenue for engineering contract work executed (including supplies & services) is recognised on the basis of percentage completion method and only after the work has progressed to the extent of 10% in each composite contract. Till such time, all the costs are carried forward to the next accounting year as Accumulated Contract Costs under Inventories. Recognition of revenue is matched with expenses incurred (on accrual basis) after considering the contract value with associated costs. Costs and Revenue are both recognised upto 90% and debtors are reflected accordingly. Balance is recognised only upon the Preliminary/Final acceptance of job by the client. Periodic advances received from customers are not considered as income.
Mukand Limited
Accounting for Long Term Engineering Contracts: (b) Income which arises out of invoicing of contract work and the contract costs which are accounted on accrual basis, are, both credited to income or charged to revenue, as the case may be, only after at least 10% of the total estimated contract costs (i.e. direct and indirect costs) are incurred (on accrual basis). Till such time, all the costs are carried forward to the next accounting year as Accumulated Contract Costs under Inventories and recognition of revenue is correspondingly postponed. Direct costs include all expenses specifically attributable to the contract. Variation in estimates of contract costs are updated each year by technical certification.
Mukand Limited
Accounting for Long Term Engineering Contracts: (c) Accumulated Contract Costs, after the stage when they are not any further to be carried forward in terms of (b) above, are charged to revenue to the extent not specifically attributable to the contract and balance is transferred to Incomplete Contract Work under Inventories. (d) Variations by way of escalation in price and quantum of work is recognised as revenue in the year in which claims are lodged as per the terms of contract. Other claims are recognised as revenue only upon final acceptance by customer.
Mukand Limited
Accounting for Long Term Engineering Contracts: (e) All facilities in the nature of assets created at the customers site and which are to be abandoned at the end of the contract, are, when under construction, carried forward at Direct costto-date as Facilities at Customers site Under construction. Upon subsequent completion, they are carried forward as Facilities at Customers site Completed (both being grouped as Other Current Assets). The completed facilities are written off in equal annual installments over the period commencing from the year of completion of the facility upto the contracted year for completion of the contract. Billable reimbursements against such facilities, if separately identified in a contract, are similarly credited in equal annual installments against the write-off over the said period.
Issues
Builder Vs Contractor Value of Turnover