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Recognition
Contract expenses are recognised by reference to
a contract's stage of completion [IAS11.22]. The
determination of the stage of completion is made
simultaneously for contract revenue
and contract expense. The stage of completion of
a construction contract is determined according
to the nature of the contract. The more common methods
include [IAS11.30]:
| a) |
the proportion
that contract costs incurred for work performed
to date, compared to the total estimated contract
costs; |
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| b) |
surveys of work performed; or |
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| c) |
completion of a physical proportion
of the contract work. |
When the stage of completion is determined on the
basis of the ratio of costs incurred to total estimated
costs, only those contract costs that relate directly
to contract work already performed are included
in costs incurred to date . Examples
of costs that are excluded are [IAS11.31]:
| a) |
materials not specifically
produced for the project and that have been
purchased or accumulated on the job site, but
not yet physically installed; and |
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| b) |
payments made to sub-contractors in advance
of their performance under the sub-contract. |
A contract that proceeds according to budget will
therefore provide a consistent profit margin throughout
the life of the contract.
However, if the outcome of a construction contract
cannot be estimated reliably, contract costs should
be recognised as expense in the period in which
they are incurred. An expected loss on a construction
contract should be recognised immediately [IAS11.32]
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Measurement
Contract costs are recorded at cost. Initially
these are included in construction contract WIP
and later recognised in the income statement
as contract expense according to the stage of completion.
The difference between the actual costs incurred
and contract expenses recognised according to the
stage of completion is recognised as construction
contract WIP .
The costs on a construction contract are assessed
independently of other contracts. The loss on one
contract cannot be offset by an expected profit
on another [IAS11.37(c)].
Disclosure
An entity should disclose, for contracts in progress
at the balance sheet date, the aggregate amount
of costs incurred and recognised profits (less recognised
losses) to date [IAS11.40]. The methods used to
determine the stage of completion should also be
given [IAS11.39(c)].
Other disclosures that should be given in respect
of construction contracts include:
| a) |
the accounting
policy for revenue recognition in respect of
construction contracts [IAS1R.108] ; |
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| b) |
the amount of contract revenue recognised
as revenue in the period [IAS11.39(a)]; |
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| c) |
advances received before work
is performed. Include within Trade and other
payables [IAS11.40(b)]; and |
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| d) |
positive and negative
WIP balances and retentions [IAS11.40(c)]. |
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