IAS 11 – Construction Contracts
Construction contract - a contract specifically negotiated for the construction of an asset or combination of assets
that are closely interrelated or interdependent in terms of their design, technology, function, or ultimate use or
purpose.
Types of construction contracts:
Fixed Price contract – A construction contract in which the contractor agrees to a fixed price.
Cost – plus contract – a construction contract in which the contractor is reimbursed for allowable or
defined costs plus a percentage of such costs or a fixed fee.
Segmenting Contracts
When a contract covers the construction of a number of assets, the contract for construction of each asset shall be
considered a separate contract when:
a. separate proposals have been submitted for each asset
b. each asset has been subject to separate negotiation and both contractor and customer were able to
accept or reject that part of the contract relating to each asset; and
c. The costs and revenues of each asset are separately identifiable.
Combining contracts
A group of contracts, each with a single or even with different customers, shall be treated as a single contract
when
a. The group of contracts is negotiated as one single package.
b. The contracts are so closely interrelated that they are effectively part of one project with one overall
profit margin
c. The contracts are performed either concurrently or in continuous sequence.
Contract Revenue
a. Initial price agreed in the contract
b. Variations, claims and incentives (to the extent that it is probable that they will result in revenue and they
are capable of being reliably measured.
Contract Costs
a. Costs that relate directly to the specific contract
b. Costs that are attributable to contract activity in general and can be allocated to contracts; and
c. Such other costs as are specifically chargeable under the terms of the contract.
Recognition of contract revenue and expenses
Contract revenue and contract costs should be recognized in the income statement when the outcome of
the contract can be estimated reliably
The revenue and costs should be recognized by reference to the stage of completion at the balance sheet
date.
When it is likely that contract costs will exceed contract revenue, then the entire loss must be recognized
in the income statement immediately, regardless of the stage of completion.
Changes in estimates are automatically accounted for in the period in which change occurs and in the
future periods
Percentage of completion method
Recognition of revenues and expenses by references to the stages of completion of a contract
Stage of completion or percentage of completion:
a. cost to cost method = cost incurred to date
total estimated cost
b. certification or surveys of work performed or
c. completion of physical proportion of the contract work
Account Titles
Construction in Progress – Asset account
Contract Billings – Liability account
Construction revenue – revenue account
Cost of construction – expense account
Contract Billings account balance > Construction in Progress account balance = current Liability section
Contract Billings account balance < Construction in Progress account balance = current asset section
Pro forma entries
incurrence of cost construction in progress xx
cash/materials/etc xx
billing Accounts receivable xx
contract billings xx
collection cash xx
accoutns receivable xx
revenue, cost & GP Cost of LTCC xx
construction in progress xx
Revenue from LTCC
revenue, cost, & loss cost of LTCC xx
construction in progress xx
Revenue from LTCC xx
additional entry at the contract billings xx
end of the contract constrution in progress xx
Construction in progress balance = cost + GP
Computation:
contract price xx Revenue (contract price x %) xx
cost incurred to date xx cost xx
est. cost to complete xx GP xx
total est. cost xx
total est. GP xx
x stage of completion x%
RGP to date xx
less: RGP prior period xx
RGP current period xx
If total est. cost exceeds contract price
Recognize the loss in full regardless of the stage of completion
Revenue = contract price x stage of completion
Cost is balancing figure/squeezed amount.
Zero profit method/cost recovery method is used in the period where stage of completion or the outcome
is not reasonably estimated. (revenue = cost)
f the outcome cannot be estimated reliably, no profit should be recognised. Instead, contract revenue
should be recognised only to the extent that contract costs incurred are expected to be recoverable and
contract costs should be expensed as incurred. [IAS 11.32]
