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Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the
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The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade
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Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of
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We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers)
who led the projects and all friends at Bankir.Ru for hosting the books.
TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip
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production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and
edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2011 Updated
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IAS 11 Construction Contracts
CONTENTS
-Applying IFRS
-IFRS News
-Accounting Solutions
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IAS 11 Construction Contracts
Introduction and Definitions Revenue is the subject of IAS 18, and revenue for Financial
Construction Contracts are the subject of International Only certain construction is covered by IAS 11
different accounting periods. Thus, the timing of recognition of Two of the conditions for the recognition of revenue require
contract revenue and contract costs is a key issue of the the entity to have transferred to the buyer the significant risks
standard. and rewards of ownership of, and effective control over, the
goods sold.
IAS 11 is special as it enables revenue and profit to be
recognised during construction under specified conditions IAS 11 defines a construction contract as “a contract
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IAS 11 Construction Contracts
negotiated for the construction of an asset or a combination Indications that the seller transfers control of the work in
the seller to provide construction services to the buyer’s (i) the construction taking place on land that is owned or
specifications. leased by the buyer;
Features that, individually or in combination, may indicate that (ii) the buyer having a right to take over the work in progress
an agreement is for the seller to provide construction services (albeit with a penalty) during construction, for example to
to the buyer’s specifications include: engage a different contractor to complete the construction;
(i) the buyer being able to specify the major structural (iii) in the event of the agreement being terminated before
elements of the design of the real estate before construction construction is complete, the buyer retaining the work in
begins and/or specify major structural changes once progress and the seller having the right to be paid for work
construction is in progress (whether it exercises that ability or performed (subject to buyer acceptance).
not);
The terms of contracts for construction services tend to be
(ii) the seller transferring to the buyer control and the such that there is a continual delivery (transfer of control and
significant risks and rewards of ownership of the work in risks and rewards of ownership) from the seller to the buyer
progress in its current state as construction progresses. as construction progresses.
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IAS 11 Construction Contracts
For example: (continuing transfer of control and risks and rewards of
-the buyer typically has a right to take over the work in Features that, individually or in combination, may indicate that
progress (albeit with a penalty) before construction is
complete. an agreement is for the sale of goods (covered by IAS 18
-the seller earns the right to be paid primarily on the basis
of work performed (subject to client acceptance) rather Revenue, not IAS 11 Construction Contracts) include:
than purely for the delivery of finished goods.
(i) the negotiation between buyer and seller primarily
The building of houses and apartments by a developer may concerning the amount and timing of payments, with the
not meet the conditions of IAS 11, especially if they are to be buyer having only limited ability to specify the design of the
sold to multiple buyers, even if they have been pre-sold. real estate, for example, to select a design from a range of
agreement and buyers have only limited ability to influence (ii) the agreement giving the buyer only a right to acquire the
the construction and design of the real estate. There is no completed real estate at a later date, with the seller retaining
’continual delivery’ to the buyer during the construction phase control and the significant risks and rewards of ownership of
revenue and profit can be accrued during construction. If the of estimates are necessary throughout the contract.
the criteria of IAS 11. Building for your own use is covered in As a bank’s involvement in property increases, so does the
need for banks to employ their own property experts.
IAS 16 Property, Plant and Equipment. Speculative building
Concerns for Bankers
will normally produce inventory and be classified according to
IFRS primarily concerns the economic value and profit of
IAS 2 Inventories (see chart of property types later in this transactions, whilst bankers are deeply concerned about
liquidity and cash flows.
workbook).
Construction contracts are medium and long-term ventures.
Money from the purchaser may be received at infrequent
An effective internal financial budgeting and reporting system, intervals. This may require the contractor to provide finance
for much of the work for considerable periods of time before
which is kept up-to-date at all times, is required to control reimbursement, with a potential for liquidity problems arising
as a result.
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IAS 11 Construction Contracts
Regular reviews of the cash flows are needed to ensure that Entity A can reliably estimate the outcome of the contract.
any slippage is quickly identified and action taken.
Solution
The contract revenue may change from one period to the Yes. The date at which contract activity is entered into and the
next, as a result of contract variations, claims, penalties, and date when the activity is completed fall into different accounting
cost-escalation clauses. The revenue may be partly or wholly periods.
accrued and therefore not matched by cash received.
The work in progress system K uses to track its production
Another major concern with construction contracts is hidden processes should be used to determine the stage of completion
losses generated by making insufficient progress, or mistakes of each contract at the balance sheet date. Revenue on
in the early or middle stages of the contract, causing cost contracts for the manufacture of the printing presses should be
overruns to appear in later accounting periods. recognised by reference to the percentage of completion method
(see below).
Hidden losses may occur from costs that are believed to be Example:
rechargeable to clients that the client refuses to accept.
Does the production of a series of assets meet the definition of a
1.4 Definitions construction contract?
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IAS 11 Construction Contracts
fall into a single accounting period. 1.5 Scope
Example: Example:
You agree with a contractor to build an office block including a As part of a new head office complex, you are building a new
branch of your bank over a 3-year period for $10million. For road. A clause in the contract requires you to restore all grass
the contractor, at the end of years 1 & 2, unbilled revenue will areas beside the new road.
be increased by the national annual rate of inflation recorded
on the 31st of December. The restoration is part of the contract.
Cost-plus Contract When a contract covers more than a single asset, the
construction of each asset should be treated as a separate
A cost-plus contract is a contract where the contractor is contract when:
reimbursed for allowable costs, plus a percentage profit (or
fixed fee). Cost plus is the standard for some contractees (for 1. Separate proposals have been submitted for each
example, some government bodies). asset;
2. Each asset has been a separate negotiation and each
Example: party could reject the part of the contract applying to
You agree to buy a security vault for the contracted costs, that asset; and
plus a 10% profit. 3. Costs and revenues of each asset can be measured.
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IAS 11 Construction Contracts
The cost for each branch is negotiated separately, and you The tailoring of the software should be accounted for as a
receive a 10% profit, based on the agreed cost for each construction contract in accordance with the principles of IAS 11,
branch. and the fee for the use of the software and the maintenance
support should be recognised on a straight-line basis over the
Each branch should be treated as a separate contract. period of the licence in accordance with IAS 18.
The contracts were negotiated as a single package; the client 2. Variations in the contract work, claims and incentive
must accept both or reject both. The contracts are closely related payments.
and will be performed in a continuous sequence. An overall profit (These are included if it is probable that they will result
margin should be recorded as work is performed on both in revenue, and are capable of being reliably
contracts. measured).
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IAS 11 Construction Contracts
Claims are levied by the contractor on the client for costs not You are building a head office. If the actual completion date is
a month (or more). earlier than the planned completion date,
included in the contract price. Often, these stem from your firm will earn a bonus (and the client can start operations
early)..
problems caused by the client, such as wrong specifications,
This is an example of an incentive payment.
errors in designs, and delays.
Contract estimates need to be revised, either for actual
Example: performance, or new considerations of future performance.
You have been contracted to demolish some houses, and
build a clearing house. You were promised vacant Example:
possession. When your staff arrives, they find that the tenants You are redeveloping a retail site in the city centre. You had
still occupy the old houses. It takes a month to re-house planned to work 24 hours per day, but the city has just
them, delaying the start of work. passed regulations to halt building work at night.
This may be the basis for a claim. You may have to revise your contract estimate.
included in project revenue when the amount of the claim that Progress payments and advances received from clients often do
not reflect the work performed. On what basis should management
is likely to be paid can be reliably determined. assess a project’s percentage of completion?
when it is likely that they will be earned. At the end of year 1 P incurred costs of 60,000. The client was
invoiced for 50,000 at the end of year 1. Payment of this progress
billing is due, early in year 2, in accordance with the normal credit
Example: terms that P offers.
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IAS 11 Construction Contracts
3) Costs allocated to contract activity in general,
Management estimated the stage of completion as 33%, based on which are allocated to the contract.
the amount invoiced.
Costs relating specifically to the contract include:
Solution
The percentage of completion should be determined from: the 1. Site labour costs, including supervisors.
proportion of costs incurred to date; the percentage of physical 2. Materials used in construction.
work complete; or services performed to date. Amounts invoiced to 3. Depreciation of plant and equipment used.
clients do not necessarily influence the stage of completion. 4. Transport of staff, materials and assets to the site.
5. Hiring plant and equipment.
Based on the relationship between the costs incurred to date and 6. Contract design and technical assistance work.
total estimated costs, the contract is 40% (60,000/150,000) 7. Rectification, guarantee, and expected warranty
completed at the end of year 1. Revenue of 80,000 (40% of costs.
200,000) should be recognised at the end of year 1. 8. Claims from third parties.
The 50,000 progress billing invoiced to the client should be Incidental income (from sale of equipment at the end of the
recognised as an adjustment to construction account receivable in contact, surplus materials and scrap) will reduce these costs.
the balance sheet. The construction account receivable balance is
Example:
disclosed separately on the face of the balance sheet (SFP).
You are demolishing an old building, prior to building a call
centre. You sell the materials from the old building for scrap.
1.7 Contract Costs This is incidental income.
Contract costs should be expensed as incurred. Costs may
be carried over to future periods only if they will be Other costs chargeable to the client may include some
reimbursed in those periods. general overheads, or development costs, that the client has
agreed to be billed under the contract.
Revenue is generated as detailed in the previous section,
and matched with the costs of the period as detailed in the Example:
following section. You are building 100 branches of various sizes. Your client
asks that you spread the architects’ fees over costs of all the
Contract costs comprise: branches.
1) Costs that relate specifically to the contract.
2) Other costs chargeable to the client, under the This is an example of general development costs being
terms of the contract. spread over different contracts.
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IAS 11 Construction Contracts
would be carried forward as an asset: prepaid expenses for
Costs allocated to contract activity in general include:
contracts.
1. Construction overheads.
2. Insurance.
3. Borrowing costs of the contractor.
Example:
Borrowing costs of the contractor should be expensed as
incurred. Expenses to be included in contract cost incurred
Borrowing costs of the owner are the subject of IAS 23 and When the stage of completion is determined by reference to the
may be capitalised according to IAS 23. contract costs incurred to date, only those contract costs that
reflect work performed are included in costs incurred to date.
Costs that are not included in the contract, and cannot be
allocated to the contract, are treated as general overheads. What amount of expenses should management include in
contract costs incurred when determining the stage of
Costs incurred in securing a contract can be included as completion?
contract costs, if they are separately identifiable, and it is
likely that the contract will be won. Background
Example:
You have a team whose sole job is to write bids for
costs for bids likely to be won. Costs for bids likely to be won
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IAS 11 Construction Contracts
The specialist equipment is tailored according to the
requirements of the particular contract, and is therefore to be
considered in the stage of completion when it is delivered to the
site.
The following expenses are not included in contract costs to date Example:
because they do not reflect on work performed in the current
year: What amount should be recognised as profit or loss for the
contract in each year?
Material delivered to the site to be used in future 300
periods Background
Provision for environmental clean-up costs at end 200 T is constructing a building for its client. The construction is in its
of construction second year of the three-year project.
Payments to sub-contactors in advance for work to 100
be performed Management had originally assessed the contract to be profitable
Total 600 and recognised a profit in year 1 of 20,000, based on the
percentage of the contract that had been completed at that time.
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IAS 11 Construction Contracts
Management now believes the contract will incur a cumulative Any anticipated excess of total contract costs over total
loss of 30,000. contract revenue should be recognised immediately.
Management has proposed that a loss of 30,000 on the contract Contract costs that relate to future work on the contract, and
is recognised in year 2, but has questioned how the profit of for which the client will pay, can be treated as an asset,
20,000 recognised in year 1 should be treated. usually work in progress.
Solution Example:
Management should immediately recognise a loss in respect of You are building a training centre, and have imported some
the contract of 50,000 in year 2. This represents a reversal of the insulation material that will not be needed until next year.
20,000 profit recognised in year 1 and the 30,000 loss expected (This was done to avoid an imminent price rise announced
on the contract as a whole. by the supplier).
The loss has been assessed through a revision of the estimated You have also paid an advance to a subcontractor.
costs to completion. The appropriate accounting entry is therefore
to recognise the adjustment in the current year’s results rather
than record a prior-period adjustment. Both items should be booked to work in progress.
1. Total revenue can be measured reliably. recognised may not be paid, the uncollectable amount is
2. Contract costs to complete can be measured reliably.
3. The stage of completion is known. recognised as an expense immediately on recognition. It is
4. Actual costs can be compared with prior estimates.
not an adjustment of revenue.
For cost-plus contracts, contract costs must be identifiable,
whether or not they are reimbursable.
Example:
Using the percentage of completion method, revenue is You are a subcontractor. The contractor has approved your
recognised in the income statement in the periods, in the work, and you have recognised the revenue according to the
periods in which the work is done. contract. The client is delaying payment, for reasons that are
Costs are recognised as incurred. not clear. You should create a doubtful debt provision for the
disputed revenue.
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IAS 11 Construction Contracts
1.9 Stage of Completion Calculation Note: Progress payments and advances received from
clients often do not reflect the work done.
The contract is the main reference. Methods may include:
Example:
1. The proportion that costs incurred for the work to On signing a contract to build a credit card clearing house, you
date relate to the estimated total costs. receive a payment of 10% of the contract price.
Example:
You are building a duplicate securities trading centre as part When the outcome of a Contract cannot be estimated:
of your client’s disaster plan. The client’s surveyors have
confirmed that 37% of the work is complete, and No profit is recognised, though an expected loss
recommended payment for the work. should be recognised immediately.
Solution Example:
Management should not recognise construction contract work in
progress in respect of the costs incurred on the web sites. All
Your client has not paid you for your work on the agreed date.
costs should be expensed as incurred.
Construction contract accounting also applies to rendering Arguments ensue, but you think that your client has serious
services. However, management does not have a clear and
reasonable estimate of the costs likely to be incurred in the financial problems, and the contract is at risk.
development of each web site.
The costs therefore do not meet the recognition criteria for 2. Pending litigation or legislation.
construction contract work in progress. Example:
Revenue should be recognised only to the extent that You are rebuilding on an old industrial site. The government
management believes the costs will be recovered. Management
will therefore need to defer all revenue until the end of the finds toxic effluent has been leaking from the site, and applies
contract if there is uncertainty about collectability.
to the court for an order to stop work.
Management will be able to recognise work in progress and
follow the normal principles for construction contract revenue
recognition once it has established a track record of web site 3. Lack of clarity in the contract on reimbursement of
development costs. This is likely to be after the first financial year. costs.
Example:
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IAS 11 Construction Contracts
You are building a client service centre. Government officials Example:
You are constructing a building for a client. Project revenue is $20m.
demand additional health and safety features, which are not
Costs to date are $6m, and you estimate that additional costs to
covered by the contract. You submit a variation proposal to completion are $10m.
the client, who refuses it, claiming the cost is yours. (Costs have been accumulated in an asset account: construction
in progress. An alternative method is to expense them as incurred.)
4. Anticipated failure to complete the contract. The client has, so far, only approved $4m of the expenditure, as his
Example: staff is on holiday for the month.
You are building a call centre. Part of the site unexpectedly You believe that the $2m ($6-$4m) will be approved). No payment
has been received.
becomes flooded, and you cannot determine whether or not the call
Recognise:
centre will be completed within the contract period. $4m as expense (the amount approved)
$5m as (accrued) revenue (4/16*$20m).
$2m is left as construction in progress. ($6m-$4m=$2m)
Example: Percentage of Completion -2 revenue is recognised, and all costs are immediately
10% is now completed, costs total $3m
Cost of sales I $3m expensed.
Work in progress B $3m
Deferred revenue B $5m
Revenue I $5m
Revenue recognition –when 10% of
the work is completed
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IAS 11 Construction Contracts
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Notes to the table on the previous page. 2. The stage of completion.
Note 1: Where an asset is revalued, increases in carrying amounts 3. The amount of profits on other contracts.
above cost are recorded as revaluation surplus, in equity.
Using fair values, all changes in fair value are recorded in Example:
the income statement. You have five separate construction contracts with the same client.
Reductions below cost are recorded in the income statement Your project in France is hit by strikes, which means additional
under both methods. costs, and penalties for late completion. This will create a loss for
the project, though the four other projects will make enough profits
Note 2. In the cases of cost or revaluations, the carrying value will to cover the loss.
be reduced by accumulated depreciation and accumulated
impairment (see IAS 36). You must still recognise the loss on the French project immediately.
Workbooks are available on our website on each standard that Changes In Estimates
The percentage of completion method is calculated on a cumulative
explain each accounting treatment with examples.
basis, in each period. It is based on current estimates. A change in
2 Recognition of Expected Losses and Changes in
Estimates estimates of final revenue, or costs, is recognised in the period that
Any anticipated excess of total contract costs over total contract the change is made.
revenue should be recognised immediately.
Example: 3 Disclosure
You are going to build a financial services centre. You hire staff,
machinery and materials. You travel to the site, and find that the
An enterprise should disclose:
land is subsiding. The client offers another site, but for the same
contract price.
1) the amount of contract revenue recognised as revenue in
This would reduce your loss, but not eliminate it. Recognise the
the period;
loss immediately.
IAS 11 CONSTRUCTION CONTRACTS
2) the methods used to determine the contract revenue (b. the gross amount due to clients for contract work as a
recognised in the period; and liability.
3) the methods used to determine the stage of completion of The gross amount due from clients for contract work is the net
contracts in progress. amount of:
An enterprise should disclose each of the following for contracts in (a. costs incurred plus recognised profits; less
progress at the balance sheet date:
(b. the sum of recognised losses and progress billings
1. the aggregate amount of costs incurred and recognised
(less recognised losses) to date for all contracts in progress for which costs incurred plus
recognised profits (less recognised losses) exceeds
2. the amount of advances received; and progress billings.
3. the amount of retentions The gross amount due to clients for contract work is the net amount
of:
Retentions are amounts of progress billings, which are not paid until
the satisfaction of conditions specified in the contract for the (a. costs incurred plus recognised profits; less
payment of such amounts or until defects have been rectified.
(b. the sum of recognised losses and progress billings
Progress billings are amounts billed for work performed on a
contract whether or not they have been paid by the client. for all contracts in progress for which progress billings exceed costs
incurred plus recognised profits (less recognised losses).
Advances are amounts received by the contractor before the An enterprise discloses any contingent liabilities and contingent
related work is performed.
assets in accordance with IAS 37 Provisions, Contingent Liabilities
An enterprise should disclose:
and Contingent Assets.
(a. the gross amount due from clients for contract work as an
asset; and Contingent liabilities and contingent assets may arise from such
4 Specific Examples A summary of the financial data during the construction period is
given on the next page:
Example 1: Determination of Contract Revenue and Expenses
The stage of completion for year 2:
The following example illustrates one method of determining the
stage of completion of a contract, and the timing of the recognition 5.040/8.400 = 60%, so we recognise revenue to date of 60% -
of contract revenue and expenses. 10.000 * 60% = 6.000.
A construction contractor has a fixed-price contract for $10,000 to 60%. is determined by excluding costs incurred for work performed
build a training centre above a shopping mall. The contractor's to date the 300 of materials for use in year 3.
initial estimate of contract costs is $7,500. It will take 3 years to
build. The amounts of revenue, expenses and profit recognised in the
income statement in the three years are as follows:
By the end of year 1, the contractor's estimate of contract costs has
increased to $8,400 (and remains so the end of year 2).
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IAS 11 CONSTRUCTION CONTRACTS
ii) costs that are attributable to contract activity in general and can
* Please see the following table. be allocated to the contract; and
Excluded
Description of cost Included
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IAS 11 CONSTRUCTION CONTRACTS
Costs of materials used in construction Claims from third parties relating to the
contract
Construction overheads
* unless the reimbursement is specified in
Insurance (include contract-specific the contract
insurance and an allocation of general
insurance)
Specific example 4:
*
General administration and selling costs
Costs of variations and claims to be included in contract work
Depreciation of plant and equipment used in progress
on the contract
A variation is included in contract revenue when:
Depreciation of idle plant and equipment
that is not used on a particular contract i) it is probable that the client will approve the variation and the
amount of revenue arising from the variation; and
Costs of moving plant, equipment and ii) the amount of revenue can be reliably measured.
materials to and from the contract site
Claims are only included in contract revenue when:
Costs of hiring plant and equipment
i) negotiations have reached an advanced stage and it is probable
Costs for clean-up at end of contract that the client will accept the claim; and
*
Research and development costs
ii) the amount the client will probably accept can be measured
Borrowing costs reliably.
Costs of design and technical assistance Should the variations and claims to the contract be included in
that is directly related to the contract contract revenue?
1. Background
i) the client approved changes Yes, all criteria are met. The
to the contract’s design 5,000 can be included in the H is building a parking area for $300,000 for its client.
specifications with a total contract price (revenue). The client has paid $250,000 so far.
cost of 5,000.
ii) due to poor weather, the No, the client will probably not $250,000 is accounted as 'payment in advance' in H's financial
contract will overrun by 3 approve the variation amount. statements.
months. This will lead to an The additional costs already
increase in costs of 3,000. incurred should be included in the But it is actually H's sales revenue, is that correct?
The client will probably not calculation of WIP if the contract is
approve the amount of still profitable. However, a lower Answer
revenue arising from the expected profit margin should be
variation. recognised because of the No, it is a 'payment in advance' shown as a liability.
additional costs incurred. The For example, if a client pays H $250,000 today in advance for a
total expected loss should be parking area that H has not started to build, and for which no costs
recognised immediately if the have been incurred, H cannot record any revenue.
additional costs will result in a loss
on the contract. Advance payments and sales contracts do not change the
iii) due to unforeseen No, negotiations have not reached percentage of completion.
circumstances the an advance stage where it is
contractor incurred probable the client will accept the H records the revenue (possibly revenue receivable) in proportion
additional costs in the claim. The contractor should to the work done as percentage of the whole work.
current year on the contract. include the additional costs in the
Negotiations to obtain the WIP calculation and recognise a The three options in calculating Revenue, depending on the level of
client’s acceptance of these lower expected profit margin due knowledge of the transaction’s final outcome are:
claims are in early stages. to the additional costs incurred.
iv) the client will probably Yes, all criteria are met. The
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IAS 11 CONSTRUCTION CONTRACTS
1. Anticipating a profit: Percentage of completion method. and the revenue will be $ 100,000,000 /$ 150,000,000 * $
2. Anticipating Break-Even: Recovery of costs, only. 300,000,000 = $ 200,000,000.
3. Anticipating a loss: Non-recovery of costs (but full expensing
of costs). Profit = $ 100,000,000
2. Background
H will build 1,000 hotel rooms within a leisure complex, each will
cost $150,000, H will be paid $300,000 per room.
Answer
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IAS 11 CONSTRUCTION CONTRACTS
Background
($millions.)
200
Contract Revenue The rooms are now fully built, but the hotel complex has not yet
100 been registered with the authorities.
Contract Expenses
0
Expected Losses Answer
If the rooms are ready for occupaancy, they should be considered
Recognised profits less recognised losses as complete if there is a reasonable expectation that there will be
100 no problem (other than a time delay) with the registration.
Contract Costs incurred in the period
100 Specific examples 5 + 6 were provided by Mr. Begum Kadioglu, of
100 Marmara University, Turkey
Contract Costs incurred recognised as
contract expenses in the period (as above).
5 Multiple Choice Questions
Contract Costs that relate to a future period
0 1. The start and finish of Construction Contracts normally fall into:
(This is to balance any cash paid for
expenses for work to be done in future
1) the same accounting period.
periods.)
2) different accounting periods.
200
Contract Revenue (as above).
160
Progress Billings
40 2. A key issue of the standard is:
Unbilled Contract Revenue
0
Advances (to subcontractors) 1) The timing of recognition of contract revenue and contract
(This is to balance any cash paid to costs.
subcontractors for work to be done in 2) Selection of reporting currency.
future periods.) 3) Balance sheet structure.
Further point
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IAS 11 CONSTRUCTION CONTRACTS
3. An effective internal financial budgeting and reporting system to 8. Contract revenue should comprise:
1) All cash flows.
control construction contracts is: 2) Initial revenue agreed, plus variations, claims and incentive
payments.
1) Helpful.
9. Variations can only increase revenue.
2) Unnecessary.
3) Required.
1) True.
2) False.
4. Cost-escalation clauses may be a feature of fixed-price
contracts:
10. Claims relate to costs included in the contract price.
1) True.
1) True.
2) False.
2) False.
5. In a cost-plus contract, you can charge:
11. Incentive payments can be included in the revenue at the start
of the contract.
1) All costs plus a profit margin.
2) Costs agreed under the contract, plus an agreed profit.
1) True.
2) False.
6. You can combine and segment construction contracts:
12. Contract estimates may be revised.
1) To reduce work.
2) To reflect economic reality, under specified conditions. 1) True.
2) False.
7. A contract may provide for an additional asset at the client’s
option, or by way of an amendment. 13. Contract costs only include costs that relate specifically to the
Can this be treated as an additional contract? contract.
1) No. 1) True.
2) Maybe. 2) False.
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IAS 11 CONSTRUCTION CONTRACTS
1) Can be ignored.
14. Incidental income, such as from the sale of scrap materials, 2) Should be expensed immediately.
should be shown as: 3) May be treated as an asset.
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IAS 11 CONSTRUCTION CONTRACTS
2. Contract Disclosures
(Please complete the table.) In the next example, another contractor has reached the end of its
first year of operations.
($000’s. Recognised Recognised
To
in prior in current
Date Both its contracts’ costs incurred have been paid for in cash.
years year
All its progress billings and advances have been received in cash.
Contract costs incurred for contract 2 include the cost of materials
1.1.2 Year 1
that have been purchased for a future period.
Revenue (30,000 x - For contract 1, the client has made an advance to the contractor for
33%) work not yet performed.
Expenses (22,500 x -
33%) The status of its contracts in progress at the end of year 1 is as
follows:
Profit -
Year 2
Revenue (30,000 x
60%)
Expenses (25,200 x
60%)
Profit
Year 3
Revenue (31,500 x
100%)
Expenses
Profit
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1.
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