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IAS11 Construction Contract – Para11.31 talks about determination of stage of completion with reference to contract cost and asks to exclude future activity related cost., unless the materials have been made specially for the contract. Contention here is that with its literal interpretation, one can recognize revenue early by getting material made in advance in bulk qty. which is going to get consumed over longer period; such recognition is fundamentally against the basic framework and will be against substance over form; but such kind of gap gives room for early recognition of revenue.
in this case when the work includes materials that have great weightage of the contract amount it is considered that the work is progressed with some percentage for its supply and considered payment for material on site
Dear respected Colleague,
That is indeed a briliant question which sorrowfully you dont see much here.
From my POV it is all about the weight of the "specially made material" and how it is reflecting on the revenue. As if the "specially made material" has a relatively large percentage of the total costs means that the project has completed this percentage and hence reached that stage, which eventually should report its revenue as if it went the other way around and reported loss he could be avoiding Tax, misleading the parteners, etc., however if the "specially made material" has a non material percentage of the total costs hence it wouldnt reach any place if it all has been made and ready.
i think in this situation the cost should be divided on the duration of the project and not recorded immediatly
