CONSTRUCTION CONTRACTS IAS 11 – DEFINATION IAS 11 defines a construction contract as: a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function for their ultimate purpose or use. IAS 11 – TREATMENT Where possible, IAS 11 applies the accruals concept to the revenue earned on a construction contract.
If the outcome of a project can be reasonably foreseen, then the accruals concept is applied by recognizing profit on uncompleted contracts in proportion to the percentage of completion, applied to the estimated total contract profit. If, however, a loss is expected on the contract, then an application of prudence is necessary and the loss will be recognized immediately. OUTCOME CAN BE RELIABLY MEASURED IAS 11 only allows revenue and contract costs to be recognized when the outcomes of the contract can be predicted with reasonable certainty.
This means that it should be probable that the economic benefit attached to the contract will flow to the entity. If loss is calculated, then the entire loss should be recognized immediately. If a profit is estimated, then the revenue and costs should be recognized according to the stage that the project has completed. There are two ways in which stage of completion can be calculated, either the: * Work certified method (sometimes referred to as the sales basis) Work certified to date Contract price * Cost method Costs incurred to date
Total contract costs WHAT IS INCLUDED IN CONTRACT REVENUE AND COSTS? Contract revenue will be the amount agreed in the initial contract, plus revenue from variations in the original contract work, plus incentive payments and claims that can be reliably measured, such as contract revenue which can be valued at the fair value of received or receivable revenue. Contract costs are to include costs relating directly to the initial contract activity, plus costs that can be specifically charged to the customer under the terms of the contract.
