IAS 11 Summary Notes

IAS 11 Construction Contracts

INTRODUCTION

A construction contract is a contact specifically negotiated for the construction of

Construction
an asset or a combination of assets that are closely interrelated or interdependent
contract
in terms of their design, technology and function or their ultimate purpose or use.
Contract revenue shall comprise:
(a) the initial amount of revenue agreed in the contract; and
Contract
(b) variations in contract work, claims and incentive payments to the extent
revenue
that it is probable that they will result in revenue and they can be reliably
measured.
Costs that relate directly to a specific contract include:
(a) site labour costs, including site supervision;
(b) costs of material used in construction;
(c) depreciation of plant and equipment used on the contract;
(d) costs of moving plant, equipment and materials to and from the contract
site;
(e) cost of hiring plant and equipment;
(f) costs of design and technical assistance that is directly related to the
contract;
(g) the estimated costs of rectification and guarantee work, included expected
Contract warranty costs; and
costs (h) claims from third parties.

Costs that may be attributable to contract activity in general and can be allocated
to specific contracts include:
(a) insurance;
(b) costs of design and technical assistance that are not directly related to a
specific contract; and
(c) construction overheads.

Costs that are specifically chargeable to the customer under the terms of the
contract.

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IAS 11 Summary Notes

RECOGNITION OF CONTRACT REVENUE AND COSTS

Outcome of a contract Outcome of a contract can be estimated reliably.

cannot be estimated
reliably
Recognise revenue equal
to costs incurred (i.e. no
profit or loss is to be
recognised)
Expected outcome: Profit Expected outcome : Loss
Revenue and costs should be The whole loss to completion
recognised according to the should be recognised
stage of completion of the immediately.
contract

IAS 11 establishes the conditions to be met before it can be taken that the outcome of a contract
can be estimated reliably: (for calculating contract outcome do not include one off items like
rectification)
The amount of revenue is known at the outset.
 Total contract revenue can be measured reliably
 It is probable that the economic benefits associated with the contract will flow to the
Fixed
entity
price
 Both the contract costs to complete the contract and the stage of contract completion
contract
at the reporting date can be measured reliably.
 The contract costs attributable to the contact can be clearly identified and measured
reliably so that actual contract costs incurred can be compared with prior estimates.
The basis for calculating revenue, but not the amount of revenue, is known at the
outset:
Cost
 It is probable that the economic benefits associated with the contract will flow to the
plus
entity.
contract
 The contract costs attributable to the contract, whether or not specifically
reimbursable, can be clearly identified and measured reliably.

DETERMINING THE STAGE OF COMPLETION

IAS 11 indicates several ways in which the percentage of completion of contract may be arrived at:
Cost method Cost to date / total estimated costs
Work certified Work certified / contract price
method
Physical proportion Completion of a physical proportion of the contract work (given as a %)

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IAS 11 Summary Notes

PRESENTATION IN FINANCIAL STATEMENTS

IN SPL
Cost method Work certified method Other
Revenue (balancing figure) TR x % – RLY TR x % – RLY
Costs TC x % + OOI – RLY (balancing figure) (balancing figure)
Profit TP x % – OOI – RLY TP x % – OOI – RLY TP x % – OOI – RLY

Note 1: in case of loss recognise whole loss as follows: TL + OOI – RLY

Note 2: in case outcome of contract cannot be reliably estimated contract costs should be
recognised as an expense in the period in which they are incurred and revenue should be
recognised only to the extent of contract costs incurred that are recoverable.

IN SFP (in current assets / liabilities)

Receivable [Progress billings – cash received] XXX
Gross amounts due to / from customers
Costs incurred to date XXX
Add: Profit (loss) recognised to date XX/(XX)
Less: Progress billings to date (XXX)
XXX_

Note 1: Unless otherwise mentioned, normally it is assumed that whole of progress billings have
been received.

ABBREVIATIONS KEY:
TC Total estimated Costs excluding one off items
OOI One Off Items e.g. rectification costs, redesigning etc.
RLY Recognised in last years
TP Total estimated Profits excluding one off items
TR Total estimated Revenue
TL Total Loss

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IAS 11 Summary Notes

EXAMPLE 11A
The information relates to a construction contract:
Estimated contract revenue is $ 800,000
Cost to date is $320,000

The business is not able to reliably estimate the outcome of the contract although it is believed
that all costs incurred will be recoverable from the customer.

What amounts should be recognised for revenue, costs and profit in the income statement?

EXAMPLE 11B
SHL builds bridges. The projects generally take a number of months to complete. The company
has three contracts in progress at the year ended 30 April:
A B C
$m $m $m
Costs incurred to date 200 90 600
Costs to complete 200 110 200
Contract price 600 300 750
Progress billings 40 70 630

SHL calculates the percentage of completion by using the costs incurred compared to the total
costs?

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IAS 11 Summary Notes

ANSWER 11A

$
Revenue (same as cost) 320,000
Costs (320,000)
Profit (loss) Nil

ANSWER 11B

SPL A B C Total
$m $m $m $m
Revenue (β) 300 135 550 985
Cost [TC x %] (200) (90) (600) (890)
Profit/(loss) 100 45 (50) 95

SFP A B C Total
Gross amounts from and to customers: $m $m $m $m
Contract cost incurred 200 90 600 890
Recognised profits (losses) to date 100 45 (50) 95
Progress billings (40) (70) (630)
Due from customers 260 65 325
Due to customers (contract liability) (80) 80

Workings (in $m):

A B C
1. Total estimated costs $200 + 200 $90 + 110 = $600 + 200 =
= $400 $200 $800
2. Percentage Completion 200 /400 = 90 / 200 = 600 / 800 =
50% 45% 75%
3. Contract outcome
Contract revenue 600 300 750
Cost to date (200) (90) (600)
Cost to complete (estimated) (200) (110) (200)
Total estimated profit (loss) 200 100 (50)
4. Profit (loss) recognised 100 45 (50)

Dated: 16 August 2016

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