Introduction and the Framework


Contracts covering the construction of several assets would be treated as separate contracts for accounting purposes if



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Contracts covering the construction of several assets would be treated as separate contracts for accounting purposes if:

  • Contracts covering the construction of several assets would be treated as separate contracts for accounting purposes if:
    • • Separate proposals were submitted for each individual asset
    • • Each part of the contract was negotiated as a separate part and
    • • The revenues and related costs are separable
  • If the contract includes an option to build an additional asset, the arrangement would be accounted for as a separate contract if the additional asset differs from the rest of the assets or the price is negotiated separately
  • Grouping or segregating contracts allows the accounting to follow the economic substance of the contract negotiations and ensures that any losses are appropriately recognized

Contract revenues include the amounts originally agreed to in the contract plus variations, claims, and incentive payments that are measurable and probable

  • IAS 11 – Contract Revenue
  • Contract revenues include the amounts originally agreed to in the contract plus variations, claims, and incentive payments that are measurable and probable
  • Variations, claims, and incentive payments are separately defined in the standard and reflect the differing nature of the revenues
  • Each has a different point for recognition of revenue.
  • Although revenues are measured at the fair value of the consideration received or receivable, they may change from period to period
    • Treated as a change in estimate
  • IAS 11 – Contract Revenue

It is important to identify all costs that are related to the contract in order to measure profit

  • IAS 11 – Contract Costs
  • It is important to identify all costs that are related to the contract in order to measure profit
  • Sometimes the method used to estimate revenues is based on the costs incurred to date; therefore, if the costs are incorrectly measured, the amount of revenue recognized will be incorrect as well
  • Contract costs should include costs that are:
    • Directly related to the contract (including materials and labor costs, depreciation, and other costs
    • Attributable to the contract activity in general (such as insurance, design costs, construction overhead, payroll processing costs, and borrowing costs) and
    • Specifically chargeable under the terms of the contract (such as general and administrative costs, development costs)

Contract costs may be shown net of incidental income such as income from resale of excess material that may have been ordered

  • IAS 11 – Contract Costs
  • Contract costs may be shown net of incidental income such as income from resale of excess material that may have been ordered
  • Costs that are attributable to the contract activity may be allocated using systematic and rational allocation methods and must be allocated consistently to all costs that have similar characteristics
  • Selling costs and depreciation of idle plant and equipment should not be included.
  • However, costs incurred in securing the contract may be included as long as they can be separately identified and reliably measured and as long as it is probable that the contract will be obtained

Revenue and costs are recognized when the outcome of the contract can be estimated reliably

  • Revenue and costs are recognized when the outcome of the contract can be estimated reliably
  • Reference is made to the stage of completion of the contract and the calculations are done cumulatively each reporting period
  • Determining whether the outcome of the contract can be estimated reliably depends on the type of construction contract
  • IAS 11 – Recognition of Contract Revenue and Expenses

In general, the key terms of the contract must be established before an entity can make reliable estimates

  • IAS 11 – Recognition of Contract Revenue and Expenses
  • In general, the key terms of the contract must be established before an entity can make reliable estimates
  • Estimates by definition may require adjustment in subsequent periods
  • The percentage of completion method is used to determine how much revenue should be recognized for fixed price contracts.
  • For cost plus contracts, the percentage of completion method is not necessary since the amount of revenue recognized each period is equal to the costs expensed plus an agreed upon profit margin or markup

According to IAS 11.30, methods for estimating the stage of completion include the following:

  • IAS 11 – Recognition of Contract Revenue and Expenses
  • According to IAS 11.30, methods for estimating the stage of completion include the following:
    • • Estimating the costs incurred to date as a percentage of total estimated
    • costs (based on inputs to the process)
    • - Exclude costs relating to future activity on the contract from the
    • numerator (e.g., supplies yet to be used and advance payments
    • made to subcontractors)
    • • Surveys of work performed (based on outputs) or
    • • Estimating the proportion physically complete, e.g., the number of
    • miles of highway completed (outputs)


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