ACCOUNTING STANDARD - 7

ACCOUNTING FOR CONSTRUCTION CONTRACTS

J.P., KAPUR & UBERAI

PURPOSEPURPOSE

• Accounting for construction contracts in the financial statements of enterprises undertaking such contracts.

• Applies to enterprises undertaking construction activities not as contractors but on their own account as venture of a commercial nature where the enterprise has entered into agreements for sale.

J.P., KAPUR & UBERAI

DEFINITIONDEFINITION

A CONSTRUCTION CONTRACT is a contract for the construction of an asset or of a combination of assets which together constitute a single project

J.P., KAPUR & UBERAI

TYPES OF CONTRACTSTYPES OF CONTRACTS

1. Fixed price contracts.

2. Cost plus contracts.

J.P., KAPUR & UBERAI

METHODS FOLLOWEDMETHODS FOLLOWED

PERCENTAGE OF COMPLETION METHOD

OR

COMPLETED CONTRACT METHOD

The method of accounting selected represents an accounting policy and therefore if there is any change in the accounting policy the effect of the change and its amount needs to be disclosed.

J.P., KAPUR & UBERAI

PERCENTAGE OF PERCENTAGE OF COMPLETION METHODCOMPLETION METHOD

Revenue is recognised as the contract activity progresses based on the stage of completion. This method can be used only if the outcome of the contract can be reliably estimated.

Normally, the profit is not recognised in fixed price contracts unless the work on a contract has progressed to a reasonable extent (20 to 25% of the work) J.P., KAPUR & UBERAI

MEASUREMENT OF MEASUREMENT OF COMPLETIONCOMPLETION

TAKING INTO ACCOUNT ALL RELEVANT FACTORS 1. The proportion that costs incurred to date bear to the

estimated total costs of the contract.

2. By the surveys which measure work performed. While recognising the profit under percentage of completion method, an appropriate allowance for future unforeseeable factors should bemade on either a specific or a percentage basis.

J.P., KAPUR & UBERAI

COMPLETED CONTRACT COMPLETED CONTRACT METHODMETHOD

Revenue is recognised only when the contract is completed or substantially completed

Costs and progress payments received are accumulated during the course of the contract but revenue is not recognised until the contract activity is substantially completed.

J.P., KAPUR & UBERAI

DISCLOSUREDISCLOSURE

The amount of construction work-in-progress

Progress payments received and advances and retentions on account of contracts included in construction work-in-progress

The amount receivable in respect of income accrued under cost plus contracts not included in construction work-in-progress.

J.P., KAPUR & UBERAI