The objective of this standard affects the accounting treatment of revenue and costs related to construction contracts. Because of the nature of the affair undertaken in construction contracts, the date at which the contracting activity is entered into and when the activity is completed usually fall into different accounting periods. Therefore, the main issue in accounting for construction contracts is allocating contract revenue and contract costs to the accounting periods in which construction work is carried out. This standard uses the recognition criteria set in the framework for preparing and presenting financial statements provided by the Institute of Chartered Accountants of India to regulate when contract revenue and contract costs should be recognized as income and expenses in the statement of profit and loss. Moreover, it provides practical guidance on the application of these criteria.
This standard should be applied while accounting for construction contracts. Therefore, contractors’ financial statements, including the financial statements of real estate developers, are usually aligned to this standard.
The following expressions are used in this standard with the definitions stated:
- A construction contract is a contract particularly negotiated for constructing an asset or a group of closely interrelated or interdependent assets in terms of their design, technology and function, or their ultimate purpose or use:
- A fixed-price contract is a construction contract in which the contractor admits to a fixed contract price or a fixed rate per unit of production, which in few cases is subject to cost hike clauses.
- A cost-plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise specified costs, plus a percentage of these costs or a fixed fee.
- A construction contract may be negotiated to construct a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. However, a construction contract may also deal with the construction of several assets which are closely associated or interdependent in terms of their design, technology and function or their eventual purpose or use; instances of such contracts include those for the construction of refineries and other complex pieces of plant or equipment.
- For this Standard, construction contracts involve:
- Contracts for providing services which are directly related to the construction of the asset, for instance, those for the services of project administrators and builders; and
- Contracts for the demolition or restoration of assets and the restoration of the environment following the destruction of assets.
- Construction contracts are formulated in several ways, classified as fixed-price and cost-plus contracts for this Standard. In addition, some construction contracts may contain characteristics of both a fixed price contract and a cost-plus contract, for example, in the case of a cost-plus contract with an agreed maximum price.
What is involved in contract revenue and costs?
Contract revenue should involve:
- The prime amount of revenue acknowledged in the contract; and
- Variations in contract work, claims and incentive remittance:
- To the extent that they will probably result in revenue; and
- They are capable of being reliably measured.
Contract costs should include:
- Costs that relate directly to the particular contract;
- Costs that are determinable to contract activity in common and can be allotted to the contract; and
- Such other costs are charged explicitly to the customer under the contract terms.
What should an entity reveal with respect to a contract?
The entity must reveal:
- The revenue recognized throughout the period.
- The methods used to regulate the contract revenue.
- The procedures used to determine the stage of completion of the contract.
In case of contracts in progress at the end of the reporting period, an entity must reveal the aggregate amount of costs incurred and recognized profits or losses, the advances gained so far and the number of retentions (if any).
Difference between AS 7 and IND AS 11
|AS 7||IND AS 11|
|Contract revenue is measured at consideration received or receivable (without considering the fair value)||Contract revenue is calculated at the fair value of the consideration obtained or receivable.|
|As per AS 7, costs attributed to “contract activity in general” and allocated to specific contracts are considered contract costs. Such costs include borrowing costs as per AS 16.||IND AS 11 does not include borrowing costs as a part of contract costs.|
|It does not deal with accounting for service concession arrangements.||Appendix A of IND AS 11 deals with the accounting aspect of such arrangements.
Appendix B of IND AS 11 deals with disclosures of such arrangements.
What does the appendix to the accounting standard include?
Infrastructure like roadways, tunnels, flyovers, health centres and jails are funded through the public budget by the public sector. However, off late, the government encourages private companies to undertake the task by constructing, operating and maintaining the same. This arrangement is cited as the service concession arrangement. Under this arrangement, a grantor and an operator agree to a public asset’s construction, operation, and maintenance. Appendix A sets out general principles on recognizing and measuring the obligations and related rights in these service concession arrangements. Requirements for disclosing service concession arrangements are in Appendix B of this Indian Accounting Standard. Here:
- The operator is the service provider and should account for the revenue as per IND AS 11 and IND AS 18. The operator has no entitlement on the assets.
- Any consideration obtained as a financial asset must be accounted for per IND AS 32, 39 and 107. If the consideration is in the form of an untouchable asset, then it must be accounted for as per IND AS 38.
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