ias 11 construction contracts summary with example p4g

7/22/2019 IAS 11 Construction Contracts Summary With Example p4g

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May/June 2011

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construction contract.

directly attributable to the

contract.

assistance.

machinery to complete the

contract.

of plant and machinery used in

the construction contract.

IAS 11 recognises two types of

construction contract that are

distinguished according to their

pricing arrangements:

Fixed price contracts are con-

tracts for which the price is not

usually adjusted due to costs

incurred by the contractor. Where

contract, this essentially means

that the contractor agrees to a

per unit of output. These types of

contracts are sometimes subject to

escalation clauses.

Cost plus contracts are where the

contractor is reimbursed for costs

plus a provision for a fee. The

contract price is determined by

the total amount of reimbursable

expenses and a fee. The fee is the

as revenue less direct costs to be

earned on the contract.

Recognition of Contract

Revenue and Expenses

IAS 11 prohibits the use of the

percentage of completion method

if this method will not result in the

reasonable level of accuracy. It fol-

lows, therefore, that the percentage

of completion method can only

be used where the outcome of the

contract can be estimated reliably.

Where the contract is either a

contract, then the following criteria

must be met to determine whether

the outcome can be reliably esti-

mated:

Fixed price contract:

laid down in the Conceptual

Framework which is that total

contract revenue can be mea-

sured reliably and it is probable

to the entity.

-

plete and the stage of comple-

tion can be measured reliably.

properly and measured reliably

so that comparison of actual

contract costs with estimates

can be done.

Cost plus contract:

to the contract, whether or not

and measured reliably.

All the conditions above must be



May/June 2011

All the costs which have been in-

curred todate have all been debited

to the contract account in the gen-

eral ledger. Leah Inc have appointed

the reporting date (31 March 2009),

the contract was 40% complete at

which point the customer made a

progress payment amounting to £15

have credited this progress pay-

ment to the contract account. There

have been no other entries made in

respect of this contract.

Required

Show how the contract should be

accounted for under the provi-

statements of Leah Inc for the year

ended 31 March 2009.

Solution

The overall revenue for the contract

price agreed).

We know that Leah has incurred

the following costs and has made

estimates of costs to complete as

follows:

As costs are less than total

revenue we know the

of ($50 million less $44 million =

$6 million).

that the contract is 40%

FinancialStatementExtracts

Revenue(40%x $50

million)$20,000

Cost ofsales

(40%x $44

million)$17,600

Step 1

Working: Gross Amounts Due from

Costs to date: $,000 $,000

Purchase of materials 9,000 $17,600

Labour and other overheads 7,000

Plant depreciation ($15,000 x 6/12) 7,500

Total costs to date 23,500

6,000

29,500

Less progress payment received (15,000)

Gross amount due from customer 14,500

Step 2

Purchase of machine $15,000

Purchase of machine $ 9,000

Labour andoverheads

$ 7,000

Estimated costs tocomplete

$13,000

$44,000

Step 3

complete, so we take 40% of the

total costs to ‘cost of sales’ in the

income statement. We then add

40% of the expected revenue to

revenue in the income statement:

We then need to work out

how much should be in

-

tion as ‘gross amounts due from

customer’. We need a working as

follows:

The gross amount due

from customer can be

shown as an ‘other current asset’ in

Step 4

Conclusion

It is important that when you

are dealing with construc-

tion contract questions that

you adopt a logical method

of dealing with the numbers

and are familiar with how to

depending on whether a con-

or uncertain. Once you have

mastered the approach and

understand how IAS 11 works,

questions on construction

contracts become a favourite

topic. Lots of question prac-

tise is the key to this area of

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ias 11 construction contracts summary with example p4g

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