Jun-11

(iv)
($'000)
Contract revenue
Contract costs
Attibutable profit / (lo

(A)
Total
12,500
(9,500)
3,000

Todate
(65%)
8,125
(6,175)
1,950

(v) Amount due from contract customers

Revenue recognised
8,125
Costs recognised
(6,175)
Billing issued
(8,125)
Cost incurred
7,300
1,125
Answer

(B)
Recognised
Last year
in PL
3,500
(2,660)
840

4,625
(3,515)
1,110

(A) - (B)

Billing Amt due

and
(to) / from
incurred customers
8,125
7,300

1,125
1,125

Pilot Q5
a) A construction contract generally has the following characteristic :i) Contract sum (revenue) is pre-agreed, and total budgeted costs are known to the contractor before the
work starts.
ii) Progressive billing to customers, and collection is based on such billing.
There are three possible way to recognise the revenue and profit for such contract :i) Recognised all revenue and profit upon signing the contract

The argument for this is that revenue is known and contracted, plus the profit can be measured reliably
at the start of the contract. However, adopting this kind of policy will lead to over aggressive revenue
recognition and report huge volume of unrealised profit.
ii) Recognised all revenue and profit upon completion

The argument for this is that prudence concept is exercised and the confirmed amount of revenue and
profit give no room for error in estimation. However, adopting this kind of policy will violate the
accrual concept, where a revenue must be reported when it is earned (in line with the progress of the
contract).
iii) Recognise revenue and profit based on progress of the contract

This is known as percentage of completion method as per IAS 11, which is a fair method to report the
revenue and profit based on level of completion of the construction.

b)
The outcome of contract for 1 and 2 can be measured reliably. 1 is a profitable project and will be
accounted for using stage of completion. 2's foreseeable losses will be recognised immediately in
income statement.
Calculation of stage of completion
1

$3,300
$5,500

60%

$840
$1,200

70%

Contract revenue
Contract costs

1 ($'000) Recognised in income statement

5,500
3,300
(4,000) (2,400)

Attibutable profit / (lo

1,500

900

2 ($'000) Recognised in income statement

Contract revenue
1,200
840
Contract costs
(1,250)
(890)
Attibutable profit / (lo
(50)
(50)
Note : Full loss of $50,000 will be recognised immediately.
Income statement (extract) for the year ended 31st March 2006 ($'000)
1
2
Total
Contract revenue
3,300
840
4,140
Contract costs
(2,400)
(890)
(3,290)
Attributable profit / (loss)
900
(50)
850

Statement of financial position (extract) as at 31st March 2006 ($'000)

1
2
Total
Current Assets
Amount due from contract customers
Revenue recognised
3,300
Costs recognised
(2,400)
Billing issued
(3,000)
Cost incurred
3,900
1,800
1,800
Current liabilities
Amount due to contract customers
Revenue recognised
Costs recognised
Allowance for loss
Reversal of allowance for loss
Billing issued
Cost incurred

840
(890)
(50)
50
(880)
720
(210)

(210)