CONSTRUCTION CONTRACTS
distinct goods/services that are
Revenue recognition principle (PFRS 15)
1. Identify the contract with customer.
 The contract is with a customer and the
collectability of consideration is
probable.
 Contract- agreement between two or
more parties creating enforceable rights
and obligations
 Attributes: (ALL must be met)
a. Parties have approved the contract
and are committed to perform
b. Each party’s rights to
goods/services can be identified.
c. The payment terms for
goods/services can be identified.
d. The contract has commercial
substance.
e. It is probable that an entity will
collect the consideration.
 Any consideration received is
recognized as liability and recognized as
revenue only when EITHER has
occurred:
o The entity has no remaining
obligation to transfer goods or
services to the customer and
all, or substantially all, of the
consideration has been
received and is non-refundable.
o The contract has been
terminated and the
consideration received is non-
refundable.
2. Identify the performance obligations in
the contract.
 Each promise to deliver a distinct good
or service in the contract is treated as a
separate performance obligation.
 Performance obligations-
o Promise in a contract with a
customer to transfer the
customer either good/service
that is distinct or series of
substantially the same and have
the same pattern of transfer.
o Can be both explicit and implicit
 A promised good or service is distinct if:
a. The customer can benefit from the
good or service either on its own or
together with other resources that
are readily available to the
customer. A customer can benefit
from a good or service if the good
or service could be used,
consumed, sold for amount that is
greater than scrap value or
otherwise held in a way that
generate economic benefit.
b. The promise to transfer the good or
service is separately identifiable
from other promises in the
contract.
 If no transfer to customer = no PO
 Separately identifiable:
o If good or service is not an input
to a combined output specified
by the customer
o If it does not significantly
modify another good or service
promised in the contract
o If it is not highly interrelated
with other goods or services
promised in the contract.
 A promised good or service that is not
distinct is combined with other goods
or services until a bundle of goods or
services that is distinct is identified.
3. Determine the transaction price.
 Transaction price
o The amount that the entity
expects to be entitled to in
exchange for satisfying a
performance obligation
excluding the amounts
 collected on behalf of third
parties.
o The contract price and any
subsequent variations in the
contract price to the extent
that it is probable that they will
result in revenue and they are
capable of being measured
reliably.
 How to determine the transaction
price?
o Variable Consideration
o Constraining estimates in
variable consideration
o Existence of significant
financing component
o Noncash consideration- at FV
o Consideration payable to
customer
4. Allocate the transaction price to the
performance obligations.
 The transaction price is allocated to the
performance obligations based on the
relative stand-alone prices of the
distinct goods or services.
 To allocate the transaction price to each
performance obligation in an amount
that depicts the amount of
consideration for transferring promised
goods/services.
 How to allocate transaction price?
Based on relative stand-alone selling
prices except for: allocating discounts
and allocating consideration with
variable amounts
 Stand-alone selling price
o The price at which the entity would
sell promised good/service
separately to the customer.
o 1. Take observable prices.
2. If observable selling prices not
available = make estimates
5. Recognize revenue when a
performance obligation is satisfied.
 For a performance obligation satisfied
over time, revenue is recognized as the
entity progresses towards the complete
satisfaction of the performance
obligation.
 For a performance obligation satisfied
at a point in time, revenue is recognized
when the entity completely satisfies the
performance obligation.
 Revenue is measured at the amount of
transaction price allocated to the
performance obligation satisfied.
 Performance obligation is satisfied
when a promised good or service is
transferred to customer.
 Contract Costs
a. Costs to obtain a contract
o Sales commission, legal fees,
bonuses to employees
o CAPITALIZE + AMORTIZE
b. Costs to fulfill a contract
If not within IAS 2/IAS 16/IAS 38:
CAPITALIZE if:
o Costs relate directly to contract
o Costs generate/enhance
resources used in satisfying
performance obligation in the
future
o Costs are expected to be
recovered
Construction Contract
 Contracts for the rendering of services
that are directly related to the
construction of asset
 Contracts for the destruction or
restoration of assets, and the
restoration of the environment
following the demolition of assets.
 Generally long-term
Combination of contracts
  Each contract is accounted for
separately.
 If same time with the same customer:
combined and accounted for as single
contract if:
o The contracts are negotiated as
a package with a single
commercial objective.
o The amount of consideration to
be paid in one contract
depends on the price or
performance of the other
contract
Over Time (if one of the ff is met)
 The customer simultaneously receives
and consumes the benefits provided by
the entity’s performance as the entity
performs.
 The entity’s performance creates or
enhances an asset that the customer
controls as the asset is created or
enhanced.
 The entity’s performance does not
create an asset with an alternative use
to the entity and the entity has an
enforceable right to payment for
performance completed to date.
 Output methods
 Input methods
o Recognize revenue on the basis
of efforts or inputs expended
relative to the total expected
inputs needed to fully satisfy a
performance obligation.
o Cost incurred, resources
consumed, labor hours
expended, machine hours used,
time elapsed
Cost-to-cost method
 Most common application of the input
methods
 Estimation of stage of completion by
reference to the proportion that
contract costs incurred for work
performed to date bear to the
estimated total contract costs.

Transaction Price
 Fixed price contract
o The contractor agrees to a fixed
contract price or a fixed rate
per unit of output, which in
some cases is subject to cost
escalation clauses

 Cost plus contract

o The contractor is reimbursed
for allowable or defined costs,
plus a fee.

Methods of measuring progress