Lkas11 Construction Contracts

8/12/2019 Lkas11 Construction Contracts

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Uditha De Zoysa

LKAS 11 ConstructionContracts

rec or,

12 June 2012

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Agenda

Scope and definitions

Segmenting and combining construction contracts

Recognition of contract revenue and costs

IFRIC 15 LKAS 11 Vs LKAS 18

New developments on revenue recognition3

Definition

... a contract specifically negotiated ...

... for the construction of an asset, or a combination of assets ...

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... that are closely interrelated or interdependent in terms of their

design, technology and function or their ultimate purpose or use.


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Type of contr acts

Construction contracts

Fixed price

Contractor and customer agreed a fixed price or

Cost plus

Contractor is reimbursed for allowable or otherwise defined costs, plus

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a percentage of these costs or a fixed fee

Segmenting construction contracts

One contract number of assets

Separate propo sals for each asset?No

No

No

Yes

Yes

Separate negotiatio n / acceptance foreach asset?

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asset?

SEPARATE constru ction contr act for eachasset

One constructioncontract

Yes


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Combining construction contracts

Group of contracts

Negotiated as a singl e package?

Interrelated overall profit margin?

No

No

No

Yes

Yes

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continuous sequence?

SINGLE con tract Separatecontracts

Yes

Add it ion al ass et at cus tomer o pt ion

Separate if:

additional asset differs significantly from the asset(s) covered by the

original contract in: design; technology; or function; or

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price of the additional asset is negotiated without regard to the original

contract price


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Contract revenue

Initial amount

Variations

Contract revenueto be measured at

fair value of theconsideration received or

receivableOnl if :

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Claims

Incentivepayment

- Probable they willresult in revenue; and

- revenue ismeasurable reliably

Revenue Measured at Fair Value

If revenue on a contract is recognized, but will be received only ,

be imputed and expected cash receipt should be discounted todetermine the fair value of the amounts receivable.

Eg: Retention

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Contract costs

Include if: Related directly to specific contract

Exclude if: Cannot be attributed to contract

Attributable to contract activity ingeneral and can be allocated to thecontract

Other specifically chargeable to thecustomer under the contract

Incurred from the date of and inorder to secure the contract only if:

relate directly to contract

ac v y or canno e a oca e o acontract:

general administration costs notreimbursable under the contract

selling costs R&D costs not reimbursable

under the contract depreciation of idle PPE not

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identifiable separately measurable reliably probable that contract will be

obtained not expensed previously

used on a particular contract

Recognition of c ontract revenue and expenses

Outcome can beestimated reliably

Outcome cannot beestimated reliably

Recognise by reference to thestage of completion at the end ofthe reporting period:

contract revenue contract costs

Recognise immediately anyexpected loss as an expense

Recognise revenue only to theextent of incurred contract costswith probable recovery

Recognise contract costs as anexpense as incurred

Recognise immediately anyexpected loss as an expense

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Reliable estimate of outcom e

ALL condit ions should be met:

Fixed price contract

Total contract revenue measurablereliably

Probable that economic benefits will flowto the entity

Cost plus contract

Probable that economic benefits will flowto the entity

Attributable contract costs (whether ornot reimbursable specifically) identifiable

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on rac cos s o comp e e an s a e ocompletion measurable reliably

Attributable contract costs identifiableclearly and measurable reliably: actual vs.estimates

Methods for determining stage of completion

Measures

Output

Surveys of work performed

Completion of a physical

Input

cost incurred to date

total estimate costs %

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NB! No specific method is mandated Progress payments and advances often do NOT reflect work performed


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Recognition of cont ract revenue and expenses Example 1

A enters into a contract to build a road for Rs.90 million. Asinitial estimate of contract costs is Rs.74 million. Thecon rac s ar s ear y n Scenario 1 - At the end of 2010 A can estimate reliably the outcome of the

contract Stage of completion is determined based on the completion of

physical proportion of the contract work Estimated to be 50% physically complete at end of 2010 Cost incurred to date Rs.37 million A reco nises at 31 December 2010:

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revenue of Rs.45 million; and

expenses of Rs.37 million.

Recognition of contract revenue and expenses Example (continued)

Scenario 2 - At the end of 2010 A cannot estimate reliably theoutcome of the contract

Costs incurred Rs.30 million It is probable that the costs will be recovered A recognises at 31 December 2010:

revenue of Rs.30 million; and

expenses of Rs.30 million.

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Percentage of completion method - changes in estimates

Percentage of completion method: application on cumulative basis in each period

to the current estimates of contract revenue

Effect of changes in estimates is accounted for under LKAS 8 - prospectively

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Changes in estimates Example 2

A enters into a contract to build a road for Rs.90 million. Asinitial estimate of contract costs is Rs.74 million. Thecon rac s ar s ear y n

Stage of completion is determined based on the completionof physical proportion of the contract work

Year-end 2009 estimated completed work 50% no changes to estimated costs to complete the work

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ear-en estimated completed work 90% estimated total costs to complete the work Rs.80 million


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Changes in estimates Example (continued)

2009 2010 2011 TotalRs.m Rs.m Rs.m Rs.m

Revenue 45 1 36 3 9 90Costs 37 2 35 4 8 80Profit 8 1 1 10GPM 17.7% 2.8% 11.1% 11.1%

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an ge n es ma esa c u a ons:1. 90x50% = 45

2. 74x50% = 373. 90x90% - 45 = 364. 80x90% - 37 = 35

Expected losses Example 3

A enters into a contract to build a road for Rs.90 million. As initial estimate of contract costs is Rs.74 million. Thecon rac s ar s ear y n

At the end of 2010, the estimated costs to complete the work increase to Rs.95 million, with no increase incontract revenue . A has to recognise the expected loss of Rs.5 million immediately

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Calculation

Total revenue = 90

Total estimated cost = (95)

Estimated loss = 5


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Issues and scope IFRIC 15

Issues addressed by IFRIC 15 Applicable standard (LKAS 11 or

LKAS 18) Timing of revenue recognition

Scope Agreement for the construction of

real estate Component for the construction

of real estate identified within an

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agreement that includes other components

LKAS 11 or LKAS 18?

Is buyer able to specify the major structur alelements of desi n and / ormajor structural changes?

LKAS 11 LKAS 18

YES NO

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NOT an accounting policy choice!!!


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When and how r ecognize revenue?

Construction contract? LKAS 11

NO

Revenue recognition

NO

Stage ofcompletion

Rendering o f servicesonly?

LKAS 18Rendering of servicesYES

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Sale of goods ? criteria met on acontinuous basis?

Uponcompletion

NO

ICASL Ruling on Deferrin g Applicatio n of IFRIC 15

O tion

Defer application of IFRIC Apply IFRIC 15 with t head o t io n o f SL FRS

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comes into effect


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Contracts with Customers ED

A new revenue recognition model that applies to revenue

Single standard would replace: IAS 11 Construction contracts IAS 18 Revenue IFRIC 13 Customer Loyalty Programmes greemen s or e ons ruc on o ea s a e IFRIC 18 Transfers of Assets from Customers

SIC31 Revenue Barter Transactions Involving Advertising Services

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The 5-step model

Step 1: Identify the contract Contract

Step 2: Identify POs in the contract PO

2PO 1

Step 3: Determine the TP TP

for the contract

PO: Performance obligationTP: Transaction price

Step 4: Allocate the TP to POs

TP allocated to PO 2

TP allocated to PO 1

Step 5: Revenue as POs satisfied

Revenue on PO 2

Revenue on PO 1


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Criteria for Recognizing Revenue Over Time

Performancecreate or enhancean asset that the

Performance does not create an asset withalternative use to the entity

an asset that thecustomer controls ustomer

receivebenefits asentity performs

Task wouldnot need tobereperformed

Entity hasthe right topayment forperformance

Performance obligations satisfied over time

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Eg Buildingconstructed on a

customers land andcustomer retains thepartly completedbuilding if thecontract was terminated

Eg Projectmanagements

service

Eg Partlyconstructed

building thatcustomer retainsif contract isterminated early

Eg Milestoneevents have been

achieved

u stions

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Contact details

KPMG.

P.O. Box 186, Colombo 03, Sri Lanka.

Department of Professional Practice DPP

Ms. Uditha de Zoysa +94 (0) 11 5 426 124

Email [email protected]

2929

Web www.kpmg.com/lk

Thank you.

Documents

Lkas11 Construction Contracts