(Summary) Ind AS 11
Is to prescribe the accounting treatment of revenue and costs associated with construction contracts. The primary issue is the allocation of contract revenue and contract costs to the accounting periods in which construction work is performed.
This Standard shall be applied in accounting for construction contracts in the FS of contractors including the financial statements of real estate developers.
- Construction Contract
- Fixed Price Contract
- Cost Plus Contract
Construction Contract is 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 or their ultimate purpose or use. It also includes agreements of real estate development to provide services together with construction material in order to perform contractual obligation to deliver the real estate to the buyer.
Contract Revenue – It shall comprise:
- the initial amount of revenue agreed in the contract; and
- variations in contract work, claims and incentive payments:
- to the extent that it is probable that they will result in revenue; and
- they are capable of being reliably measured
Contract Cost – It shall comprise:
- costs that relate directly to the specific contract;
- costs that are attributable to contract activity in general and can be allocated to the contract; and
- such other costs as are specifically chargeable to the customer under the terms of the contract.
- In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:
- Total contract revenue can be measured reliably;
- It is probable that the economic benefits associated with the contract will flow to the entity;
- Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably; and
- The contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.
- When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately
- When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period.
- In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:
- it is probable that the economic benefits associated with the contract will flow to the entity; and
- the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably.
- Change in the estimates of contract revenue and contract costs is accounted for as a change in accounting estimate.
- The amount of contract revenue recognised as revenue in the period.
- The methods used to determine the contract revenue recognised in the period.
- The methods used to determine the stage of completion of contracts in progress.
- The aggregate amount of costs incurred and recognised profits (less recognised losses) to date;
- The amount of advances received; and
- The amount of retentions.