MODULE 4: Construction Contracts

1. Apply the principles under PFRS 15 to account for revenues from construction contracts.
Focused Listing:
 Summary of the Revenue recognition Principles under PFRS 15:
(CPTAR)
a) Identify the contract with the customer (written or oral).
b) Identify the performance obligations in the contract.
c) Determine the transaction price.
d) Allocate the transaction price.
e) Recognize revenue
 Satisfaction of performance obligations either OT (overtime) or APT (At a Point of Time)
 OT if one of the criteria is met:
 The customer simultaneously receives and consumes the benefits.
 The entity’s performance create/enhances an asset that the customer controls as the asset
is created/enhances
 Entity’s performance does not create an asset with an alternative use to the entity and the
entity has the enforceable right to payment for performance completed to date.

2. Account for construction contract: Documented Problem Solutions:

1. George Co. enters into a contract to build an apartment for jungle Co. for fixed fee of
P20,000,000. At contract inception, George Co. assesses its performance obligations in the contract
and concludes that is has single performance obligation that is satisfied over time. George Co.
determines that the measure of progress that the best depicts its performance in the contract is input
method based on costs incurred. George estimates that the total contract cost would amount to
P16,000,000 over the construction period. George incurs contract costs P2,000,000 during the year.
How much revenue is recognized for the year?

a. 2,000,000 c. 4,000,000
b. 2,500,000 d. 0

Solution:
Fixed Fee 20M
Multiply:
Contract Cost/ estimates contract cost 2M/16M

Revenue Recognized for the year 2, 500, 0000

2. 2. On May 1, 20x1, Pressure Co. entered into a P3M fixed price contract to construct a gym for a
customer. Pressure Co. appropriately accounts for this contract using the percentage of completion
method based on costs. Information on the contract is as follows:
20x1 20x2
Percentage of completion 20% 60%
Estimated total cost at completion 2,000,000 2,400,000
Profit recognized to date 150,000 360,000

How much are the revenue and cost of construction recognized in 20x2?

Revenue Cost of construction

a. 1,200,000 990,000
b. 1,800,000 600,000
c. 1,800,000 1,200,000
d. 600,000 450,000

Solution: 20x1 20x2

Total contract price 3M 3M
Percentage of completion * 20% * 60%
Contract revenue 600, 000 1, 800, 000
CR prior Year (600, 000)
CR for the year 600, 000 1, 200, 000
Cost of construction (squeeze) (450,000) (990,000)
Profit recognized to date 150,000 360,000

3. Nourish your Soul: Draw your success journey.

4. Quiz: Diagnostic Learning Log

The five steps in the recognition of revenue from contracts is very important in solving construction
contracts.