AS
7
Construction
Contract
1
Issued in
Titled as
Revised in
• December
• 1983
• Accounting
for
Construction
Contracts
• Year
• 2002
2
ACCOUNTING
of revenue and cost
associated with the contract
ALLOCATION
of contract revenue and cost
to the accounting period
in which construction work is
performed
3
Construction
of an asset
In terms of
technology,
design and
use
Definition of
Construction
Contract
Or
combination
of assets
That are
closely
interrelated
or inter
dependent
4
Fixed
Price
Contract
Hybrid Contract
Cost
Plus
Contract
5
Fixed Price Contract
• Contractor agrees to a fixed contract price, or a fixed rate
per unit of output.
• In some cases, subject to cost escalation clause.
Hybrid Contract
• Combination of fixed price & cost plus contract.
• For eg: A cost plus contract with agreed maximum price.
Cost Plus Contract
• Contractor is reimbursed for allowable or defined costs.
• Plus percentage of these costs or fixed fee.
6
Construction contract includes:
Rendering of
services
directly
related to
construction
of assets
Restoration
or destruction
of assets
Restoration of
environment
following the
demolition of
an asset
7
When to combine or separate construction contracts:
Combining
Segmenting
• Separate
proposal
submitted for each
asset.
• Costs and revenues of
each asset can be
identified.
• Each asset subject to
separate negotiation
and acceptance of
terms laid in the
contract.
• Group of contracts
negotiated as single
package.
• Contracts are closely
interrelated.
• Contracts performed
concurrently or in a
continuous sequence.
8
Whether construction of additional asset be separate contract or part of existing?
A contract maybe amended to include construction
of an additional asset or maybe constructed at the
option of the customer.
The same should be considered as a separate
contract when:
The asset differs
significantly from
the original asset.
The price of asset is
independent of
original contract.
9
Initial
amount of
revenue
agreed
Penalties
Claims
Contract
Revenue
Variations
in contract
work
Incentive
payments
Escalation
Clause
10
Initial amount of revenue agreed
• It is the initially agreed amount between contractor & customer, specified
in the contract.
Claims
• It is reimbursement of costs not included in contract price.
• It may arise due to customer caused delays, errors in specification or
design or disputed variations in contract work.
Variations in contract work
• Instructions by customer for change in scope of work to be performed
under the contract.
• It may lead to increase or decrease in contract revenue.
• Eg: Changes in specifications or design of an asset and duration of contract.
11
Escalation clause
• Increase in the amount of revenue due to inflation.
• It is applicable to Fixed Price contract.
Incentive payments
• Additional amount payable to contractor, if specified standards are met or
exceeded.
• Eg: Incentive payment for an early completion of a contract.
Penalties
• Decrease in revenue due to delays caused by contractor in completion of
contract.
12
Allocated to
contract
Directly related
to specific
contract
Specifically
chargeable to
the customer
Contract
Cost
13
The components of contract cost are mentioned below:
Directly related to
specific contract
• Site labor cost
• Cost of material
• Depreciation of plant &
equipment
• Cost of hiring plant &
equipment
• Transportation charges
• Expected warranty cost
• Cost of design &
technical assistance
• Claims
from
third
parties
Allocated to contract
• Insurance
• Cost of design &
technical assistance not
directly related to the
contract
• Construction overheads
Specifically chargeable to
the customer
• General administration
and development costs
for
which
reimbursement
is
stated in the contract
14
Following costs are not attributable to a construction contract:
General
administration
cost for which
reimbursement
not specified
Depreciation of
idle plant &
machinery
Selling costs
Research &
development
costs for which
reimbursement
not specified
15
When
outcome
of
a
construction contract can be
estimated reliably
When
outcome
of
a
construction contract cannot
be estimated reliably
Contract Revenue &
Contract Cost to be
recognized
Recognize
contract
revenue to the extent
of current cost incurred
of which recovery is
probable.
By reference to the
degree of completion
of the contract activity.
Recognize contract cost
as an expense in the
period in which they
are incurred.
16
Outcome of construction contract can be estimated reliably on satisfaction of following conditions
Following conditions are to
be satisfied, In case of Cost
Plus Contract, to estimate
outcome of construction
contract reliably:
• Probable that economic
benefit will flow to the
enterprise.
• Contract cost can be
identified, measured &
analyzed.
Conditions
to
be
satisfied in case of Fixed
Price Contract apart
from those mentioned in
cost plus contract:
• Contract revenue can be
measured reliably.
• Contract cost and stage
of completion can be
measured reliably, at
reporting date.
17
Percentage
Completion
Survey
Physical
Proportion
Methods of assessing degree
of completion
18
Contract
Revenue
Contract
Cost
19
An Enterprise should disclose the following:
Contract
revenue
recognized in
the period
Methods
used to
determine
contract
revenue
Methods
used to
determine
degree of
completion
20
An enterprise should also disclose and present the following in its financial statements:
For
contracts
in progress
• Amount of
advance received
• Amount of
retentions
• Cost incurred and
profits recognized
upto reporting
date
Present
• Amount due from
customers as an
Asset
• Amount due to
customers as
Liability
21
Prepared
• In the guidance of
• CA Kapileshwar Bhalla
22