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Objective of IAS 11=
The
objective of IAS 11 is to prescribe the accounting treatment of revenue=
and
costs associated with construction contracts.
What Is a Construction Contract=
?
A
construction contract is a contract specifically negotiated for the
construction of an asset or a group of interrelated assets. [IAS 11.3] =
Under =
IAS
11, if a contract covers two or more assets, the construction of each a=
sset
should be accounted for separately if (a) separate proposals were submi=
tted
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 entire=
ty.
[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 a=
s a
separate contract if either (a) the additional asset differs significan=
tly
from the original asset(s) or (b) the price of the additional asset is
separately negotiated. [IAS 11.10]
What Is Included in Contract Re=
venue
and Costs?
Contra=
ct
revenue should include the amount agreed in the initial contract, plus
revenue from alternations in the original contract work, plus claims and
incentive payments that (a) are expected to be collected and (b) that c=
an
be measured reliably. [IAS 11.11]
Contra=
ct
costs should include costs that relate directly to the specific contrac=
t,
plus costs that are attributable to the contractor's general contracting
activity to the extent that they can be reasonably allocated to the con=
tract,
plus such other costs that can be specifically charged to the customer
under the terms of the contract. [IAS 11.16]
Accounting
If the
outcome of a construction contract can be estimated reliably, revenue a=
nd
costs should be recognised in proportion to=
the
stage of completion of contract activity. This is known as the percenta=
ge
of completion method of accounting. [IAS 11.22] To be able to estimate =
the
outcome of a contract reliably, the enterprise must be able to make a
reliable estimate of total contract revenue, the stage of completion, a=
nd
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 <=
span
class=3DSpellE>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 st=
age of
completion of a contract can be determined in a variety of ways - inclu=
ding
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] <=
o:p>
An exp=
ected
loss on a construction contract should be recognis=
ed
as an expense as soon as such loss is probable. [IAS 11.22 and 11.36] <=
o:p>
Disclosure
- amount of contract rev=
enue recognised; [IAS 11.39(a)]
- method used to determi=
ne
revenue; [IAS 11.39(b)]
- method used to determi=
ne
stage of completion; [IAS 11.39(c)] and
- for contracts in progr=
ess at
balance sheet date: [IAS 11.40]
- aggregate costs incur=
red
and recognised profit
- amount of advances re=
ceived
- amount of retentions =
Presentation
The gr=
oss
amount due from customers for contract work should be shown as an asset.
[IAS 11.42]
The gr=
oss
amount due to customers for contract work should be shown as a liabilit=
y.
[IAS 11.42]
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