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A construction contract is a contract specifically negotiated for the construction of an asset or a group of interrelated assets. [IAS11.3]
Under IAS11, 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. [IAS11.8]
Two or more contracts should be accounted for as a single contract if they were negotiated together and the work is interrelated. [IAS11.9]
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. [IAS11.10]
Contract 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 can be measured reliably. [IAS11.11]
Contract costs should include costs that relate directly to the specific contract, plus costs that are attributable to the contractor's general contracting activity to the extent that they can be reasonably allocated to the contract, plus such other costs that can be specifically charged to the customer under the terms of the contract. [IAS11.16]
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. [IAS11.22]
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. [IAS11.23-24]
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. [IAS11.32]
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. [IAS11.30]
An expected loss on a construction contract should be recognised as an expense as soon as such loss is probable. [IAS11.22 and11.36]
Revenue is Recognize as Per Percentage Of completion Method bceause it provide the accurate profit for the peroid so that tax is not paid more
COMPLETED CONTRACT METHOD OF ACCOUNTING is a method of revenue recognition for long-term contracts (i.e., contract which span more than one accounting period) whereby the total contract revenue and related cost of performance are recognized in the period in which the contract is completed. This method stands in contrast to the percentage-of-completion method of accounting and is most often used when significant uncertainty exists with respect to the total cost of performing the contract and, accordingly, the ultimate amount of profit to be recognized thereon.
Where outcome of the contract can be estimated reliably and the total revenues are likely to exceed total costs, contract revenue and costs (and hence profit) are to be recognized in the income statement on the basis of Stage of Completion of the contract (also known as Percentage of Completion Method). -
Step1 - Determine Expected Outcome of the Contract
Step2 - Calculate the Stage of Completion
Step3 - Determine the amounts to be recognized in Income Statement for Profit, Revenue and Cost
Step4 - Calculate amounts to be recognized in the Balance Sheet for Gross Amounts due to/ from Customers and Trade Receivables
Step5 - Prepare Extracts of Financial Statements in respect of Construction Contracts
Step6 - Prepare Construction Contract Control Account - See more at:
