IAS 11 Construction Contracts

IAS 11 Construction contracts • Revenue and cost: should be recognised according to the stage of completion of the contract at the

end of the reporting period, but only when the outcome of the activity can be estimated reliably. Proportion of total contract costs incurred for work carried out to date Physical proportion of the contract work completed Probable that economic benefit of the contract will flow to the entity. Costs and revenue can be identified clearly and be reliably measured.

Outcome of the contract cannot be reliably estimated: - Revenue: Only recognise revenue to the extent of contract costs incurred which are expected to be recoverable - Cost: Recognise contract costs as an expense in the period they are incurred Contract costs which cannot be recovered should be recognised as an expense straight away. If a loss is predicted (i.e. the contract value < total contract cost) on a contract then it should be recognised immediately in I/S. Costs incurred to date + costs will be incurred

Costs that should be EXCLUDED from construction contract costs: - General administration costs (unless reimbursement is specified to the contract) - Selling costs - Research and development (unless reimbursement is specified to the contract) - Depreciation of idle plant and equipment not used on in the contract Penalty charged by client (may be for delay) will reduce the revenue; will not increase the cost. Finance costs should be included in contract costs under IAS 23 Borrowing Costs.

Accounting treatments: Income Statement: Revenue ((Total contract value X % completed) – Revenue recognised in previous periods ) Cost of sales ((Total contract costs X % completed) – Costs and losses charged in previous periods) Foreseeable loss not previously recognised (ALWAYS test for foreseeable loss) (((Total contract value – Total contract cost) X % yet to complete) – Any of this loss previously recognised) Profit/(loss) Statement of financial position: Contract costs incurred to date Profits/(losses) recognised to date Progress billing to date Receivables / (payables)





X X/(X) X (X) X/(X)


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